This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Cisco's Still Misunderstood

Stocks in this article: CSCO JNPR FFIV FIRE ARUN PANW

NEW YORK ( TheStreet) -- Shares of Cisco (CSCO) have been down by as much as 12% since the company reported its fiscal fourth-quarter earnings results and are still under pressure. The Street, which has taken a "wait-and-see" approach towards Cisco, continues to show a lack of confidence in its management. While I don't necessarily have a problem with that, I don't believe investors who have taken only a cursory look at the company's performance truly understand what Cisco has been trying to do.

Take, for instance, analyst Kulbinder Garcha of Credit Suisse, who recently initiated coverage of the stock with an "underperform" rating. Garcha noted that Cisco's software-defined networking (SDN) strategy will "ultimately threaten the oligopolistic structure and superior levels of profitability seen in switching and routing." The stock price fell 1% on that report alone.

Garcha continued: "While the company aims to offer an SDN platform, we expect this product evolution to shrink gross margins. While the company aims to grow its services base, this is unlikely to be a sufficient offset."

I completely disagree with this assessment. While Garcha is correct to point out the potential slide in Cisco's gross margins, I don't believe the company's operational leverage would have been cited had Cisco's margins not taken a slight dip in the recent quarter. But Cisco's management had already signaled that margins were going to take a hit as the company got more aggressive to spur revenue growth. Plus, this strategy had nothing to do with the company's long-term SDN ambitions.

As with rivals like Juniper (JNPR) and F5 (FFIV), the entire sector has underperformed due to shrinking enterprise budgets. I've spoken about this on more than one occasion. To counter the weak spending environment, Cisco resorted to "aggressive discounting" of some of its gear.

As a consequence, though, margins took hit, to the tune of a 1% decline. But it's no cause for panic, especially since Cisco continues to beat or reach the upper-end of its guidance on every other metric that matters. In Garcha's argument, I understand why it's prudent to cite margins as an area of caution. But for a company the size of Cisco that's still amassing $4 billion in operating cash flow, it's a bit overblown

The other thing that struck a chord with me was that Garcha suggested that Cisco's SDN strategy will "threaten" its routing and switching business. Essentially, Garcha is trying to preserve Cisco's legacy hardware business, while management has been working hard to transition the company out of that mindset. It's not going to happen overnight.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs