Cisco Recognizes The Commodity Trap

| About: Cisco Systems, (CSCO)

When I wrote about Cisco (NASDAQ:CSCO) in May, I compared it with Dell (NASDAQ:DELL) and indicated it's in a commodity trap.

The commodity trap occurs when a product is no longer original and a natural market saturation has taken place. PCs and smartphones are both commodities, but we've seen the limits to the PC market while smartphones are still growing, so only PC makers are subject to the trap.

Cisco, which makes networking products, has been fighting the trap for years by moving into higher-and-higher levels of functionality. But with 802.11N wireless networking reaching 100 Mbps, and with fiber networking now becoming a commodity, there are limits to that growth.

Cisco's recent announcement that it will only achieve revenue growth of 2%-4%, while in line with analyst estimates, still followed a quarter where it guided downward.

Cisco is increasingly involved in mass market activities, rather than class market activities. Its acquisition of NDS, Inc., which makes software for video boxes, is in keeping with that trend.

The good news is that the company has stopped fighting this trend. By hiking its quarterly dividend to 14 cents a share, up 75%, the company admitted it has switched from being a growth stock to being a yield stock.

Right now you can earn 2.9% on Cisco with the dividend, and that's great. But you should not expect price appreciation. Cisco, which was once the most valuable stock on the board, is now worth about $100 billion and it's going to stay that way.

While it is extracting value for shareholders from its regular flow of earnings, the concerns of investors should also change. Instead of wondering what new product categories it's innovating, you need to focus instead on what classes of gear are becoming obsolete or getting replaced.

There is not as much difference as it appears between a networking box and a storage box -- hence the growing rivalry with EMC (EMC) -- or, for that matter, between a networking box and any other server. The specific capabilities of a networking box can be absorbed by software over time, even a fiber networking box competing with Juniper Systems (NYSE:JNPR) just as the specific capabilities of networked storage can eventually be commoditized as simple storage.

This is the kind of thing investors in Cisco should be focused on. Eventually commoditization in technology becomes obsolescence, and you may not get much notice of this happening. But the switch from being a growth stock to a yield stock is a hint that this end game is on the horizon.

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.