Let’s face it, technology isn’t going anywhere; hence, neither is Cisco (CSCO). In fact, the IT sector is expected to grow in key verticals such as cloud computing, thanks to the advent of big data, and by the potential of the Internet of Everything. As technology becomes more pervasive, and companies such as Google (GOOG) and Facebook (FB) collect increasing amounts of user information, the demand to organize and prioritize this big data has resulted in an unprecedented demand for analytic equipment. Thus, companies like Cisco, Oracle (ORCL), and Amazon (AMZN) are now battling one another in these lucrative markets; while Cisco is focused on hardware, Oracle and Amazon are focused on the development of cloud technology. Given Cisco’s strong tech presence, its large workforce, and its many decades of experience, I place them at the forefront of this data boom for the hardware market. Whereas I see Oracle emerging as a powerhouse for cloud computing.
Given the financial promise of the aforementioned markets, I find it intriguing that analysts maintain such a bearish sentiment towards Cisco and its future performance. It’s as if the gleaming potential of big data, cloud computing, and the $19 trillion Internet of Everything is overshadowed by forces not controlled by Cisco, or its competitors for that matter. Although the tech sector’s growth is slowing, it is important to remember that tech is at the center of the developed world, and is essential to the growth of undeveloped countries. Without companies like Cisco, Oracle, Google, and Microsoft (MSFT), the many things we take for granted wouldn’t exist. I mean, what would life be like if you couldn’t check your beloved Facebook feed, Twitter (TWTR) stream, or Snapchat account every five minutes? Regardless, for reasons beyond me, the same companies that have enabled us to do so much are now on the chopping block. Should investors really believe that Cisco is doomed because of a few sluggish quarters? Should investors write off Microsoft because of Steve Ballmer’s horrendous oversight? Should investors discredit Oracle because of its vague business strategy? The answer is no, because at the heart of all these companies are incredible track records maintained by intelligent employees, brilliant patent portfolios, and tremendous technology.
Take Cisco as an example, the companies’ stock price has been stagnant for the past decade. However, this does not mean Cisco is not growing. In the same time period, Cisco has steadily increased its market presence, quarterly revenues (even if they haven’t met analyst estimates), and dividend payouts. Cisco has also accumulated great cash reserves. So why is it that Cisco is so undervalued? Doubt. Doubt about its future that has emerged in light of recent earnings results. But do these results hold merit? Cisco’s previous quarter was very disappointing and its guidance for the current quarter stirred much skepticism about its future, partly spurred by the layoff of 4,000 employees. But what if I told you Cisco’s results and future guidance were the result of many uncontrollable confounding variables and that Cisco’s workforce drawback was not out of necessity, but in the interest of cutting costs?
I’m very skeptical of earnings reports to begin with, as they do not guarantee a rational market reaction. I’m even more skeptical of the explanations CEOs and CFOs give as to why their company beat or missed estimates. Hence, I usually view their comments as a way to cover their tracks. However, his reasoning for Cisco’s decreased growth this past quarter was quite logical. Chambers cited lower-than-expected domestic sales and hindered foreign sales as the main reason for Cisco’s low revenues. Given that American demand for switchboards, routers, and servers has decreased, Cisco has been forced to sell abroad in non-saturated markets. This new strategy had tremendous upside, especially in Southeast Asia, specifically China. However, the Snowden security leaks greatly harmed Cisco’s expansionary efforts in emerging markets. Not only did the leaks seem to imply that the NSA could hack all of Cisco’s hardware and code, they also made the American tech industry subject to incredible foreign scrutiny. Given the already unstable relationship between America and China, it’s not surprising that China essentially cut ties with many American tech companies. Why buy from American competitors when a domestic, government-controlled company such as Huawei can provide similar services without security threats? China’s decision is completely logical, for once. Take these revelations and combine them with the fact that China remains bitter about the United States barring sales of some Huawei products in American markets and there is zero incentive for China to support trade with American tech companies.
The Snowden leaks also severely harmed American alliances with almost all of Europe, including the economic powerhouse: Germany. Remember the whole spying on Angela Merkel fiasco? So I ask, how is Cisco expected to thrive in a global economy when uncontrollable forces shape Cisco’s playing field? Cisco can’t control the government, its security practices, or its commonplace security leaks, yet these are variables that have alienated Cisco from developed and emerging markets. These elements are out of Cisco’s control, yet they cost the company billions in lost revenue. I’m not saying that Cisco is run perfectly, I would argue far from it, nor am I saying that Cisco would otherwise have a secure future. I am, however, stating that Cisco’s valuation is completely bogus. It is a strong company with solid fundamentals, a proven track record, and large cash reserves; it is a victim of ridiculous outside forces that it can’t control. And unfortunately investors associate such uncontrollable forces with Cisco itself, as if they are the result of managerial decisions. Cisco is the apex company within the tech sector and is very undervalued; if analysts believe Cisco is floundering, and on its way to the grave, they’d better cash out their positions in other tech companies and prepare for a systemic breakdown of the tech industry as a whole.