4 Reasons Why Cisco Stock Fell

| About: Cisco Systems, (CSCO)

By Panos Mourdoukoutas

Of all investment success stories, one stands out: the story of Cisco Systems (NASDAQ:CSCO). For more than a decade since the company went public on February 16, 1990, its stock was rising by leaps and bounds, soaring from a few dollars to $630 (when adjusted for nine stock splits). Cisco was in the right business the right time, driving the hype and buzz that propelled other networking and dot.com stocks to the stratosphere. But what set Cisco Systems apart from other companies are its business fundamentals, the ability to deliver innovative products; and its alliances with other major technology players, including IBM Corporation (NYSE:IBM), EMC Corporation (EMC), Nokia Corporation (NYSE:NOK), Intel Corporation (NASDAQ:INTC), and Oracle Corporation (NASDAQ:ORCL) that help the company dominate the Internet gear market. Yet Cisco's stock couldn't define gravity, falling from around $70 (after the last split in 2000), to around $15 today! What caused Cisco's fall?

Four factors:

1.Momentum shift. Being popular among networking and dot.com investors, Cisco Systems great run up in the 1990s was, in part, driven by momentum. And as we wrote in a previous piece, momentum investing often fuels bubbles that leave investors with hefty losses once they burst and momentum shifts. Worse, momentum stocks rarely come back, as they carry the stigma of the "bubble," even stocks of companies with strong fundamentals like Cisco Systems.

2. Maturity. As is the case with other high-tech survivors of the high-tech bubble, Cisco isn't the emerging $200 million small company any more, with a few millions of shares and a few hundreds of employees, but a mature $82 billion gorilla with 5.5 billion shares and tens of thousands of employees. It is unfair and naïve to expect a mature large company to grow as an emerging small company.

3. Competition. In its early days, Cisco had little direct or indirect competition, but eventually plenty of it, as Alcatel-Lucent (ALU), Hewlett-Packard (NYSE:HPQ), and Juniper Networks (NYSE:JNPR) sought a piece of the pie. But what has hurt Cisco the most is recent completion from Chinese players like ZTE Corporation (Shenzhen- 000063) and Huawei Technologies Co.; and their bold strategy: Sell what Cisco sells at a deep discount, and dispatch cheap labor for support — a strategy successfully pursued by Korean companies like Hyundai Corporation that sells cheap cars with generous guarantees.

4. Inability to keep up with Innovations. By and large, Cisco's innovation strategy is based on strategic acquisitions, the purchase of smaller companies with breakthrough products. Over the period1993-2000, Cisco acquired seventy companies, including Cresendo Communications (1993), Newport Systems Solutions (1994), Network Translation (1995), Netsys Technologies (1996), Net Speed (1998), and Growth Networks (1999), etc. The problem with this strategy, however, is that it isn't sustainable, as owners of these smaller companies demand higher and higher premium to compensate them for the risks they assume — Cisco end up paying top prices for Net Speed and Growth Networks acquired at the peak of the high-tech bubble. Strategic acquisition further end up being dilutive to existing stockholders when paid with the issuing of new stock — that's how Cisco ended up with 5.5 billion shares.

Disclosure: I am long INTC.