Sandy Lerner and her husband Leonard Bosack founded Cisco Systems in 1984. Both worked at the computer facilities of Stanford University. The two intended to commercialize a multiprotocol system that was used at the entire Stanford campus. The software for this protocol was developed at Stanford by software engineer William Yeager. It became the basis for the Cisco Internetworking Operation System. The company banked on this product to position itself as a digital communications company. It eventually evolved into a multinational communications technology conglomerate focusing on network hardware and network software products. It was named the most valuable company in the world in 2000 with a market capitalization of $500 billion and has remained one of the large-cap stocks in the United States stock market. This article explores and analyzes the advantages and disadvantages of investing in Cisco stock.
Investing in Cisco System: Decoding the Ups and Downs of Cisco Stock
Pros: Cisco Stock Advantages
Cisco Systems went public in February 1990. It remains listed on the NASDAQ stock exchange under the ticker CSCO. The company was once more valuable than Microsoft Corporation at the dawn of the new millennium. It has maintained its status as one of the largest tech companies in the U.S. focusing on developing, manufacturing, and marketing networking hardware, software programs, telecommunications equipment, and other relevant information technology products for business customers. The following are the advantages of investing in Cisco stock:
• Strong Market Position: Investing in Cisco Systems means investing in its current status as one of the leaders in the computer networking market. It has a dominant market share in key areas like switching and routers. The company is able to use this position to promote its other networking solutions to create a viable product ecosystem.
• Dual Revenue Streams: The company generates revenues from two streams. The first is through the one-time sales of its networking hardware products. The second is through a subscription-based pricing model for its software products. The inclusion and emphasis on recurring revenues provide more predictable revenues and earnings growth.
• Solid Financial Health: Another advantage of Cisco stock is its strong financial position as seen from its strong cash flow. It had revenue of $40.04 billion in 2010 which increased to $49.16 billion in 2015. The revenue from 2015 to 2020 was stable. The company booked a new high at $56.98 billion in 2023 with a net income of $ 12.61 billion.
• Value and Dividend Stock: The current status of the company is that it is a large-cap value stock. It is also a dividend-paying stock. Cisco Systems has paid consistent dividends each quarter since 2013. Investing in the company is suitable for long-term value investors who are building or expanding an income-paying investment portfolio.
• Growth Stock Potential: Cisco has the potential to become a growth stock in the future. It has been focusing on high-growth market segments like cybersecurity, internet-of-things, cloud computing, and data centers. The providers of cloud computing and data center solutions are still dependent on traditional hardware networking products.
Cons: Cisco Stock Disadvantages
The market for computer networking has changed since the emergence and expansion of cloud computing solutions and services like AWZ from Amazon and Azure from Microsoft. This threatens the traditional hardware-based networking products of Cisco Systems. The company also competes against Juniper Networks, Hewlett Packard Enterprise, and Arista Networks in the core networking market space, as well as against companies like Microsoft and Google in the collaboration space. The following are the disadvantages of investing in Cisco stock:
• Intense Market Rivalry: The competition in the greater computer networking market has always been intense. Cisco competes against providers of traditional networking solutions and cloud-based solutions providers. It also competes with specialized companies focusing on networking software, cybersecurity solutions, and internet-of-things.
• Value Chain Challenges: Cisco Systems has wrestled with supply chain issues that have been affecting its gross margins. Its market shares in the switching and router segments have been declining due to the intensity of competition. The collaboration business of the company has also been facing disruption from tenured and newer competitors.
• Diverse Product Portfolio: The diverse product portfolio of the company can be regarded as an advantage. It allows the company to have multiple revenue streams. However, to some extent, it can also be a disadvantage because it might lead to customer confusion. Some customers might prefer doing business with companies with specialized products.
• Exchange Rate Risk: A significant portion of its revenues come from customers outside the United States. The company receives payment in different currencies. Fluctuations in foreign exchange rates can impact profitability. Take note that a strong U.S. dollar can make its products more expensive overseas and potentially reduce demand.
• Slower Stock Growth: Another disadvantage of Cisco stock is that it remains a value stock as of the moment. The stock price has never breached beyond $100.00 since it went public in 1990. The movement from 2019 remains within the $40 to $50 range. Investing in Cisco stock might not be ideal for investors who prefer a growth investing strategy.