Thursday, July 18, 2019

Expectations, Not Competition, May Be Cisco's Biggest Threat

Up more than 30% over the past year and more than 100% over the past five years (handily beating the Nasdaq over both periods), Cisco’s (CSCO) share price is at a level not seen since the dot-com bubble, when Cisco’s revenue was only about 40% of what it will likely be for this current fiscal year. While Cisco has certainly had its ups and downs over the years, losing share to later entrants like Huawei and Arista (ANET), and making some highly questionable M&A deals, the company’s more recent focus on software, service, and automation is very much in keeping with some of the bigger trends in enterprise IT.

Although the sell-side continues the “will they or won’t they?” debate about the prospects for Cisco benefiting from an upgrade/refresh cycle in campus switching, Wi-Fi 6, 5G, and ongoing spending growth in enterprise IT, the Street has already voted with its wallet, and Cisco already trades with robust growth and margin expectations in the price. While a mid-to-high single-digit annualized potential return isn’t terrible, particularly for a company with Cisco’s quality, I see more risks than upside given where valuation already is today.

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Expectations, Not Competition, May Be Cisco's Biggest Threat

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