Microsoft, Intel, Cisco (MIC) – Can The Troika Grow Again? (Part 3)

Cisco Like Microsoft MSFT and Intel INTC, Cisco Systems CSCO is a giant in its core product domain, commanding a dominating market share in the high-end router market. Like Advanced Micro Device, Inc. AMD to Intel, Juniper Networks JNPR is the only key competitor that can challenge Cisco in a meaningful way. Having conquered the router market, Cisco became restless in acquisitions in order to grow, especially around the dot com era. In Year 2000 alone, Cisco had acquired more than 20 companies. As recently as 2007, it was still acquiring more than 10 companies in year. In short, Cisco has become a serial acquirer to search for growth. Originally Cisco acquired mostly networking related hardware/system companies, and then gradually branched out to acquire companies in computer security, storage systems, Voice over IP, networking management, etc. It then decided to get into the consumer market through acquisition of Linksys in 2003. It also decided to get into remote conferencing market through the acquisition of WebEx in 2007. While many of the acquisitions did not pan out well, it did not stop Cisco from even trying to get into the consumer gadget market through the acquisition of Pure Digital Technologies, the maker of the popular pocket video camera, FlipVideo. Throughout this frenzy of acquisitions in the past decade, like Microsoft and Intel, Cisco's stock price has mostly stagnated. It is hard to imagine how Cisco envisioned itself being the king of selling both high-end routers to enterprises and telecom companies and video cameras to finicky consumers, but only very recently did Cisco admit having an indigestion problem, and promised to re-focus into its networking business. Admitting having a problem is the first step to recovery, but investors was not yet convinced as its stock languished after the announcement in April. Only in the last few days did it get a boost in its stock price again when rumors of massive layoffs in Cisco surfaced. If Cisco can really get back to its roots and re-focus its business, and reduce its cost structure through massive layoffs, its current stock price can potential return to the 20s from its current price of ~16/share easily. However, it has a broken record in delivering growth, and investors' suspicions are warranted. Also, unlike Microsoft and Intel, which currently have dividend yield of ~2.3% and ~3.0%, Cisco's yield is a paltry 0.8%, making the wait for its return of glory less appealing unless there's strong evidence of a turnaround. If an investor were interested in Cisco, but are risk averse, one of the ways would be to write an out-of-money put, e.g. a Jan 2012 $12.5 put, so the investors will only buy at a lower price, and collecting a premium for the put. An investor can also consider buying a 2013 call, e.g. Jan 2013 $20 call, to give it ample time for management to prove themselves on the turnaround. Cisco had taken the first step of admitting its problem, and now has a plan to reduce its cost structure. The next step would be to show the world it can deliver growth through new product or service offerings. Even with its broken record, we believe the stock is worth considering, and investors can devise their strategies depending on their own risk tolerances. Microsoft, Intel, Cisco (MIC) – Can The Troika Grow Again? (Part 2)
Microsoft, Intel, Cisco (MIC) – Can The Troika Grow Again? (Part 1)