Cisco is Far From Dead as Focus Shifts to New Technology

By Tom Clancy Investors are treating large cap tech like large cap pharma. Both sectors generate tremendous cash flows and are burdened by legacy costs, product obsolescence, and the law of large numbers. Investors have the impression they are losing out to smaller, more nimble, competitors. Amazon (AMZN) seems alone among the large cap technology names in continuing to sport an earnings multiple that befits its profit growth. Rather than debate what kind of earnings multiple investors apply to these stocks -- Apple (AAPL) trades at a 14 times earnings, while Amazon trades at 60 times earnings -- let's talk about what these companies do better than anyone else... reinvent themselves. Steve Jobs and Jeff Bezos have not been shy about changing their companies and adding entirely new revenue streams, seemingly every year. You may not have noticed, but if you listen to what companies are saying and doing, others have finally caught on and reinventing a company is all the rage. I have been sifting through the Ks and Qs to identify those companies that are being ignored during a period of transition, but if executed properly will be the sector leaders. For now, let's focus on Cisco (CSCO).

(To read James Kostohryz's piece on why the U.S. economy is in a tricky spot, click here.)

In my view the issue with Cisco is not its R&D budget or lack of innovation. The company has spent $24 billion in R&D over the last 5 years and created some of the most technologically advanced products on the planet. The amount of money a company spends on R&D doesn't mean much if you can't produce a product (Pfizer (PFE) spent $41 billion over the last 5 years with nothing to show for it) but Cisco has the cutting edge technology that corporate, data center, and service provider customers want and need. In fact Cisco's “New Products” (some of which were acquired) grew sales by 15% last year to $3.2 billion. As the world increases the amount of data and content it collects, analyzes, and shares, Cisco products continue to make that possible at faster and faster speeds. I can't think of another company with an offering as broad or as deep. Not all of those products are winners, but many of them are. I recently had a conversation with my company's datacenter provider who said that:

(To read Minyanville Staff's 10 amazing things you never knew about McDonalds, click here.)

“Cisco's unified server (UCS) is years ahead of the competition. Their switches and routers, integrated into their blade server, makes the network unbelievably fast. The future of technology is all about the network, and Cisco has built a better, faster, network.”

This is only one view, and stopping there creates the potential for confirmation bias in decision making, but it does show that people who make their living collecting and managing data have some pretty good things to say about Cisco's products. So Cisco's problems are less about innovation and more about sales, pricing, and market acceptance of its technology.

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