by Justin Dove, Investment U Research
Wednesday, July 27, 2011
Anyone familiar with gardening knows the concept of pruning. By selectively cutting away parts of a plant, you can help the plant grow stronger and healthier. Of course if you cut the wrong thing, it could weaken or even kill the plant.
Cisco Systems (Nasdaq: CSCO) is hoping it has properly "pruned" its operations in order to streamline its business for healthy growth.
Cisco received plenty of bad press recently for laying off 6,500 employees as part of a massive restructuring. Job cuts could reach as much as 10,000 by the end of 2011. The stock has been stagnant and steadily falling since early 2010 when it topped $25 per share. It's now trading close to lows seen in the aftermath of the dot-com bubble burst…
Cisco's Waning Powerhouse Status
Cisco certainly isn't the powerhouse that it once was. In March 2000, it was considered the most valuable company in the world with a $500 billion market cap. But these days…
- Earnings are hurting. Profits were down to $1.8 billion in the quarter ending April 30 from $2.2 billion in 2010.
- Cisco is losing market share in its bread and butter businesses; networking and switching. Companies like F5 (Nasdaq: FFIV) and Juniper (NYSE: JNPR) have taken some of Cisco's market share in recent years.
- Launches in the consumer market have failed. Most notably, Cisco bought Flip in 2009 in hopes it would lead to video conferencing solutions. That and other forays into consumer electronics have suffered poor sales.
It looks like the company spread itself too thin on efforts to expand its range of business to consumers. It certainly isn't in the poor house though, with a market cap of $80 billion.
Cisco's No Apple, But Still A Tech Industry Leader
By no means is Cisco going to surpass Apple (NYSE: AAPL) any time soon, but the company is still a leader in the technology world. It's made some poor business choices in the past few years and that's reflected in recent developments.
But, it does seem like Cisco is facing up to those problems and making moves to correct them…
- Profits may be slumping, but net cash grew to over $43 billion and the company still operates with a 60 percent profit margin.
- By going back to what it succeeds in, Cisco can take back market share and regroup. It's still a much larger company than Juniper ($16.7 billion market cap) or F5 ($8.2 billion market cap) and will likely keep a grapple-hold on the tech sector.
- This isn't the first time Cisco has made massive layoffs. It laid off 8,000 workers in 2001. In late 2002, shares touched the single digits. By 2004, Cisco was trading above $25.
- Cisco is still innovating – It will be a major player in the cloud computing environments for businesses. While clouds for consumers get most of the attention, many companies will look to clouds to lower costs and increase efficiencies. It's also releasing a new tablet called Cius designed specifically for business. The tablet also docks into a stationary phone to enable video conferencing.
Cisco is sitting on tons of cash and has some innovative products coming down the pipeline. The company will certainly be an interesting one to watch over the next year as their continued restructuring takes hold.
Good investing,
Justin Dove