Cisco Is A Safe Bet

Dec. 9.13 | About: Cisco Systems, (CSCO)

Great investment plays can be made when one is bold enough to go against the flow. Yes, it is very risky to move against a thousand sheep - but if you dare look really far into the horizon, the fields over there are the best pasture. Don't be depressed by the numbers, the risk factor for buying more CSCO shares is still within the safe zone.

I would like to reiterate the buy recommendation I made in my previous article on Cisco Systems, Inc. (NASDAQ:CSCO). The headwinds that forced the company to announce ugly Second Quarter 2014 guidance are temporary setbacks. The initial negative perception by the stock market of CSCO's declining revenue trend was a bit exaggerated.

Cisco shares dived after the November 13 release of its disappointing First Quarter 2014 financial report. As of December 6, CSCO's price is still down by 7.92% over last month's level. The market is still pessimistic over Cisco's future so I think now is a great time to buy on the dip. CSCO had a 52-week high of $26.4 last August. The recent price swings of CSCO at around the $21 mark gives daring value investors the chance to buy the shares on the low.

The current P/E ratio of 11.60 makes Cisco attractive. Yes, I agree that CSCO's cash-cow hardware-centric networking business will keep on declining due to imminent threats of competition and political setbacks in emerging markets. The existing downgrade recommendation for Cisco is justified by recent events in China and the emergence of cheaper Software Defined Networks products.

On the other hand, I'm more optimistic that the recent moves of Cisco's management toward a cloud-centric business model make it more valuable in my eyes. I'm not bothered by short-term setbacks, rather I'm looking far into the future. CSCO shares will receive the same stellar bullish trend once the company shows significant revenues from its non-hardware networking products. It may not happen in the next two years but I'm optimistic this theory will be proven within the next five or six years.

Lock-In Strategy Makes Cisco Successful

One reason why I'm very bullish on Cisco is that it knows how to use its proven lock-in method in cornering much of the networking business. This tactic worked great for the last two decades. The management is again using the lock-in deal to offer its cloud data and SDN services to its huge pool of existing customers.

Its current move to sweet talk corporations to try Cisco's homegrown SDN product, Application Centric Infrastruction, is a pure lock-in play. SDN bigwigs like Juniper, VMWare and HP can only cry foul but they can't do anything about Cisco's strong-arm move to protect its global hardware network infrastructure.

The short-sellers are wrong: Cisco is NOT going to be left out of the SDN bandwagon. It is cunning and ruthless. It showed these very admirable traits with Insieme. It quietly funded the start-up SDN company and then suddenly bought Insieme last November. It's a covert spin-in move that makes me smile up to now. With 100% ownership of Insieme, Cisco can mold the SDN product to whatever purposes it may serve its best interests. Who cares if ACI is a bastard version of SDN. Corporations will choose it if Cisco offers ACI in the same price range that VMWare or HP charges for their SDN solutions.

Cisco Is So Rich, It Can Consolidate the Industry

Weak investors who sold their CSCO stocks forgot to take into account that Cisco has a giant cash reserve of almost $50 billion. It CAN afford to buy out almost all of its existing competition. In the networking business, Cisco is the top orca whale predator. It can easily swallow Juniper Networks (NYSE:JNPR), Alcatel-Lucent (ALU) and VMWare (NYSE:VMW).

Consolidation is always good for business. If Cisco management decides to take over some of its bigger competition, the company will ultimately benefit. A merger with its frenemy VMware is a great move for Cisco. The combined size of these two behemoths, if antitrust regulators allow it, will make it big enough to dictate industry terms. Oligopoly, like what memory chips and hard drive players are enjoying, is a strong possibility for Cisco's line of business.

Right now, there are too many firms engaged in the networking business that price wars are a bane. Cisco, thanks to its huge cash reserves, may probably initiate steps to consolidate the industry to protect its leadership. Alcatel-Lucent is very vulnerable to a takeover. If it doesn't make a turnaround by 2014, ALU investors may soon be amenable to a Cisco rescue offer.

CSCO at $21 or $22 is cheap. It is still safe to buy the shares now. Almost all investment firms that downgraded the stock still recommended a hold or buy for it - and gave Cisco's an average target price of $26 with a high of $30. Go long with CSCO.

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.