June 22, 2011 Leave a comment
Cisco’s stock has been in a steady decline since the summer of 2010. It’s now available at a very attractive valuation. At a price of $15.14, I find that the market assumes a 7% yearly decline of revenue for the next 5 years, which seems like an unlikely event.
Understanding today’s price
1. Loss of market share in their core business due to competitors launching superior products (high-end market)
2. Cisco’s bureaucratization has lead it away from its customers, giving competitors the opportunity to attack Cisco’s weaker product lines.
3. CEO John Chambers is disliked by many investors as he is considered responsible for a wave of bad investments
Why buy Cisco now ?
1. Successful UCS launch shows that Cisco hasn’t lost its ability to innovate and execute.
2. Cisco’s core market is expected to grow 9% a year for the next 5 years. Therefore, the market’s expectation of a 7% yearly decline of Cisco’s sales is tantamount to a collapse of the company, a clear overreaction.
3. Cisco’s fair value – considering a reasonable loss of market share – is estimated at $23 to $27 per share,
4. Current price of $15.14 discounts Cisco’s failure to maintain its competitive position. If Cisco fails to execute, fair value will be around $13 per share, allowing acquiring the stock at a very interesting risk / reward ratio.