Why Cisco Shares Could Become The Next Tech Value Trap

Oct.25.12 | About: Cisco Systems, (CSCO)

Investing in tech stocks has become very tricky over the past few months. Some industry leaders are now seen to have increasingly doubtful futures as tablets and other dynamics make a mark on the tech sector. The rising popularity of tablets has caused weaker demand for PCs, and the effects of that have been felt by chipmakers like Intel (NASDAQ:INTC) to PC makers like Hewlett-Packard (NYSE:HPQ). Both of those stocks are trading near 52-week lows. In another troubling sign, even Microsoft (NASDAQ:MSFT) shares have been hit hard as investors question the future of the Windows operating system in a world that is increasingly shifting toward mobile devices, like the ever-popular iPhone and iPad. All of these stocks seemed like great values every time the share price dropped, but buying the dips has not worked for most investors. That has turned many tech stocks into value traps. The PC world is not the only area seeing rapidly changing dynamics, and that means other tech stocks could be next to join the value trap list.

Cisco Systems (NASDAQ:CSCO) appears to be a solid value when considering its P/E ratio and dividend yield. The shares trade for about 8.5 times earnings, and it offers a yield of around 3%. However, this stock might continue to follow other tech stocks that are sliding as emerging competitive threats impact revenues and profit margins in the future. Hewlett-Packard shares are now trading at about four times earnings, which shows how brutal the markets can be to a tech company that has growth concerns. Cisco could be facing challenges to growth as new technologies like software-defined networking (SDN) allow companies to buy generic routers that can result in significant cost savings. A number of companies can challenge Cisco in network routing equipment by offering SDN networking products, and this could result in lower revenues and weaker profit margins in the coming quarters.

The other big issue facing Cisco and other major tech companies is that the global economy is showing renewed signs of weakness. That is already starting to show up in the earnings reports for many companies. Cisco's rival in networking, Juniper Networks (NYSE:JNPR), recently announced earnings and guidance that confirmed a slowdown in IT spending by corporations around the world. Cisco CEO John Chambers has done a great job at cutting costs in the past couple of years, but that can only go so far. If revenues and profit margins shrink in the coming quarters, Cisco shares could be the latest to make it on the growing list of tech value traps. The shares could be poised to re-test the lows made in late July at about $15, if financial results do not meet expectations.

Here are some key points for CSCO:

  • Current share price: $17.17
  • 52-week range: $13.30 to $22.34
  • Earnings estimates for 2012: $1.95 per share
  • Earnings estimates for 2013: $2.09 per share
  • Annual dividend: 56 cents per share, which yields 3.1%

Juniper Networks is a leading maker of networking equipment that could also be impacted by profit margin pressure, as SDN networking products become increasingly popular with companies that are trying to save money.

Here are some key points for JNPR:

  • Current share price: $16.12
  • 52-week range: $14.01 to $25.61
  • Earnings estimates for 2012: 78 cents per share
  • Earnings estimates for 2012: $1.11 per share
  • Annual dividend: none

Data is sourced from Yahoo Finance.

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.

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.