With VMware's (VMW) acquisition of network virtualization company Nicira, could it be that Cisco (CSCO) has finally missed a market transition? John Chambers, Chairman and CEO, of Cisco is proud of Cisco's "ability to capture market transitions that matter most", as noted in the company's Q3 2012 earnings call held on May 9, 2012, so don't count the company out.
Cisco has a strategic partnership with VMware and EMC (EMC) related to virtual computing, which Cicso indicated in the Q3 2012 earnings call was doing extremely well. Cisco also has a $100 million investment in Insieme, a competitor to Nicira, and has an option to buy the company for an additional $750 million. Looks like the virtual networking market is getting hot. Time will tell if Cisco can leverage its competitive advantage in the networking marketplace to take advantage of virtual networking.
Cisco announced it will lay off 1,300 employees as the company is seeing slowing demand for IT equipment. In the Q3 2012 earnings call, the company noted continued areas of concern with regard to Europe, the global economy, public sector, India and conservative IT spending, with Europe and customer conservatism having worsened during the quarter.
In the conference call, Mr. Champers noted the struggles of some of its competitors such as Juniper Networks (JNPR), Alcatel (ALU) and Huawei with regard to lower and slowed growth, while Cisco reported record revenue and earnings per share for two consecutive quarters and revenue of $11.6 billion representing 7% year-over-year growth. Cisco experienced growth in its major geographic areas with growth of 3% in the Americas, 5% in Europe, Middle East and Africa and 24% in Asia Pacific, Japan and China.
On a very positive note, Cisco noted the company's CloudVerse product is being used in over 70% of the leading cloud providers. CloudVerse enables organizations to build, manage and connect public, private and hybrid clouds.
Cisco's stock price has been up and down over the last year, and down over the last two years as shown below:
Cisco's stock price is currently near its previous support level in the $15 range.
At this point, Cisco's future prospects are cloudy, at best, and an investor in the company might consider entering a protected covered call or collar for the company in order to position for a potential return, even if the stock price is stagnant, and to protect in case the stock price takes a significant drop. A protected covered call may be entered by selling a call option against the stock and using some of the proceeds from selling the call option to purchase a put option for protection or "insurance."
Using PowerOptions tools, a variety of protected covered call positions are available for Cisco as shown below:
The second position in the table above with a potential return of 2.4% (35% annualized) looks the most attractive, even though the second position in the table above has a slightly less potential return than the top position's 2.5% (14% annualized) potential return, the second position has a higher annualized potential return. Additionally, the second position's maximum loss of 4.5% is only slightly more than the top position's maximum potential loss of 4.4%. So even if the stock price drops all the way to zero, the maximum loss that can be experienced for the second position is 4.5%. The specific call option to sell is the 2012 Aug 15 at $0.66 and the put option to purchase is the 2012 Aug 14 at $0.21.
- CSCO Stock (existing or purchased)
- Sell CSCO 2012 Aug 15 Call at $0.66
- Buy CSCO 2012 Aug 15 Put at $0.21
A profit/loss graph for one contract of the Cisco protected covered call is shown below:
For a stock price below the $14 strike price of the put option, the value of the protected covered call remains unchanged. If the stock price increases to around $17, the position can most likely be rolled in order to realize additional potential return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.