Cisco Systems: A Strong Buy Recommendation

| About: Cisco Systems, (CSCO)

Cisco Systems (NASDAQ:CSCO) is the world's biggest maker of internet protocol based networking equipments. Cisco routers and switches are heavily used for the interconnectivity of public and corporate data, video, and mobile networks. Governments, multinational corporations, and private home end-users rely on Cisco equipments for their internet traffic.

Cisco has a current market capitalization of $120.4 billion based on its latest stock price of $22.46. This tech company's share has enjoyed a spectacular 30.96% increase since a year ago when it was only hovering at $16 to $17.

It enjoyed its highest peak last August when Cisco shares were trading for $26.49. That buoyant market valuation was inspired by Cisco's glowing 2013 annual financial reports where its management made a projected gross revenue estimate of $48.67 billion and a net income of $9.983 billion for 2013.

Recent Share Price Decline

However, the market's infatuation for Cisco has cooled off quickly. Since August, Cisco's price tumbled 15% down back to $22.40+ level. This negative market reaction is highlighted by the recent downgrading by MKM Partners which took Cisco from BUY down to NEUTRAL. Another investment adviser, Trade-Ideas LLC also derogatively called Cisco a "roof leaker," meaning it is not a stock worth buying this last quarter of 2013.

Apparently, some investors did not like the underperformance of Cisco when compared to other technology giants like Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). Despite having a massive economic moat, or market leadership dominance, Cisco's 2013 financial performance is way below other tech companies of comparable market capitalization.

Why the Gloom

When compared to other large cap tech companies, Cisco, on paper, is obviously lagging behind. Cisco has a low 4.5% annual revenue growth and 4.5% earnings-per-share increase. Google has an annual revenue growth rate of 16.3% and 18.1% EPS increase. Apple, on the other hand, has a 6.7% annual revenue growth and 9.8% EPS growth. The dividend yield of Cisco is nothing to be proud of because it is only at 3%.

This huge disparity against Cisco is turning off investors away. The market is now rallying behind Google because of its outstanding more-than-analyst-estimates financial success this year. Investors are most likely dumping Cisco stocks so they can buy Google shares.

Value Investment

In my opinion, Cisco cannot be compared to Google. They have a very different business model. Cisco, like all traditional hardware manufacturers, has a slower revenue growth rate. The market usually over-value non-hardware companies like Google. If you look at its Price/Earnings (P/E) ratio, Cisco is actually undervalued. At a P/E of only 10.73, Cisco is a better value investment buy compared to Google's much higher P/E of 19.32. If you are a fan of Warren Buffett, then you know that he always favors investing in companies with a very low P/E ratio. Buffett also loves steady-cash cow companies like Cisco which enjoy a dominant market share.

With almost $49 billion in gross sales, Cisco is generating enough cash flow to keep it debt-free for many years to come. The revenue growth is slow and steady but the company's profitability may soon have a major breakout. Cisco's superior networking nodes are making their competitors near obsolete.

As you may have heard, Cisco's fiercest competition, Alcatel-Lucent (ALU) is on the verge of bankruptcy. That rival is doing massive employee layoffs to save itself. While Alcatel-Lucent is busy working out a survival deal, Cisco can win more clients. Corporate clients who are worried about their database and network infrastructure will definitely abandon Alcatel-Lucent. Cisco will gladly welcome them.

More Reasons to Buy Cisco's Stock

On October 23, Cisco announced its aggressive push to control the mobile data traffic business. The company unveiled its latest project, "Cisco Expressway." It is a new mobile data-centric gateway which enables corporate professionals instant access to collaboration tools. Cisco Expressway is a big step forward because it will no longer require individual device-based log-in protocols. Android, BlackBerry (NASDAQ:BBRY), and iOS devices can instantly connect and let employees securely work together immediately.

Mobile data traffic is big business. Smartphones and tablets now outsell traditional computers. This means that more people will continue to surf the Internet with mobile phones. Cisco is in a great position to dominate this new trend towards the mobile Internet.

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.

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