On more than one occasion I've been told how wrong and misguided I've been and that "Cisco was dead."
But while the market has been taking a "wait and see" attitude and demanding more proof, Cisco has been delivering.
This time, after the company's ninth consecutive earnings beat, it seems that the Street is ready to embrace Cisco back into bellwether status. But Cisco never really left. And I don't believe that the market is saying anything new -- at least not anything that I haven't already told investors here on TheStreet a million times.
On Thursday, Cisco shares got an extra boost from (among others) analyst Kevin Dennean of Citigroup (C), who reiterated his "buy" rating on the stock, while setting a price target of $26. Dennean also said that he sees a case where Cisco can reach $30 per share, citing potential upside in Cisco's dominant core routing and switching businesses. Dennean also when on to write the following:
"Taking a detailed look at Cisco's router and switch businesses, the direct relationship between revenue growth and OECD growth is clear with both segments exhibiting correlation >0.75. An improving macro backdrop bodes well for revenue acceleration in Cisco's router and switch segments."
While I agree with Dennean's take regarding Cisco's stock price, I don't think he fully understands Cisco's strategy. He's complimenting Cisco's routing and switching business, while management has been working hard to transition the company out of its legacy hardware mindset. Essentially, Cisco wants to become more of a "software company." This is why management has spent a good portion of the company's $47 billion in cash on acquisitions for the likes of Meraki, Cariden and BroadHop. In other words, management is not as excited about its hardware business as some Street analysts seems to be. But that's no slight, either. That's not to say that the routing and switching businesses aren't bringing in the cash. But management also understands that hardware is no longer a part of Cisco's future growth strategy. In fact, these businesses have shown signs of erosion. Yet, they still power more than half of the Internet.
Meanwhile, the company's growth and investments in software-defined-networking (SDN) have become the main driver of the stock. Cisco's new outlook has also caught the attention of analyst Simon Leopold at Raymond James, who recently said that these shares were undervalued by 30%, while applying a $25 price target. In a research note to investors, Leopold said:
"We expect Cisco to outline its strategic vision to become a broader IT supplier with a greater software bias, which aids margin. We expect Cisco maintains its 5-7% long term growth target while offering cautious commentary on the near term."
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