Cisco's (NASDAQ:CSCO) products, services and business model require careful analysis and consideration. A fundamental, financial and technical set of perspective provides credible guidelines to making this decision but cannot give the full answer regarding Cisco's likely future prospects. To do so in detail would require vast knowledge of computer hardware, processor design and manufacture, programming and other minutiae of the digital world.
Cisco offers a plethora of hardware and software related to the Internet. VPNs, IP products, data centers, processors and cloud computing are all within Cisco's domain. Hardware research, design, manufacture and marketing are done in-house. To illustrate the scope of Cisco's ambitions, refer to a press release issued by MarketWatch on 9/18/2013. Cisco is unveiling a new design for incredibly powerful network processors. These processors are to be combined with expanded Internet architecture meant to handle an anticipated surge in traffic volume and bandwidth use.
Cisco's executives announced that the company will lay off 5 percent of its workforce as a cost-cutting measure. Though the company posted solid quarterly profits, competitors are nipping at Cisco's heels. InfoWorld's "10 Competitors Cisco Couldn't Kill Off" lists some businesses that make Cisco management very nervous. Among them are Riverbed Technologies (NASDAQ:RVBD), Juniper (NYSE:JNPR), Aruba Networks (NASDAQ:ARUN) and computer giant Microsoft (NASDAQ:MSFT). With the right hires and sales strategy, any of them can potentially cut deep into Cisco's customer base.
Cisco executives are advertising a push to dominate the emerging "Internet of Everything" that aspires to "connect people, data, processes and things." Monetizing this "Internet of Everything" could give the company a break from stiff competition in traditional network and online-computing services.
The company has another trick up its sleeve. Gigaom publication presents an article that outlines Cisco's bright growth prospects in data center services. This aspect of the company's operation is relatively recent, having started in 2009. It is now a point of pride for Cisco management and an enticing revenue generator for investors.
At the time of this writing, Cisco had a market cap of 132.94B, 38.48 percent higher than EV of 96.00B. It has a reasonable TTM P/E of 13.33 and a 5-year PEG ratio of 1.28. As with market cap, the 5-year PEG hints at a significantly overvalued enterprise.
Crucially, return ratios for the past twelve months imbue a slight sense of pessimism. Cisco's TTM return on equity and assets are at mediocre levels with:
•ROE of 18.08 percent
•ROA of 7.46 percent
Compare Cisco ROE and ROA with a major competitor such as Microsoft:
•ROE of 30.09 percent
•ROA of 12.69 percent
Other competitors such as Juniper and Aruba Networks have TTM return ratios substantially worse than Cisco. Note that a competitor does not have to be financially healthy to successfully compete for customers. Even when operating on a loss, a rival business can take in revenue that might have gone to Cisco.
Cisco's balance sheets and income statements for the past three fiscal years show a persistent positive trend. Cash flow is shaky for FY 2012 due to unusually large investing activities. However, operating cash flow retained a steady increase, showing wise cultivation of revenue streams. Based on an overview of Cisco's financial statements, the company is a solid deal for investors.
Cisco stock performance is punctuated by steep, near-vertical price drops and spikes. Using MAs, stochastics, RSI and MACD is a risky trading strategy because, once again, near-vertical sudden price changes frustrate an assumption of "smoothness" when it comes to the usefulness of technical indicators.
Future earnings are likely to hinge on two projects:
•the "Internet of Everything"
•continued profits from data center services
Investors with money already in Cisco stock should hold on to their shares. The company has a history of respectable and persistent growth. A forward annual dividend of 2.80 percent will buttress gains and blunt any sting of capital losses. Institutional investors hold over 74 percent of Cisco stock, something "smart money" does not do if it was pessimistic about Cisco's prospects. However, those without a technical background looking to invest in Cisco for the first time may be better served by a company that has a simpler line of products and services.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.