Last fall, I wrote an article titled “The Trouble with Cisco”. Now, it’s more like ‘The Reality of Cisco’.
The tech sector is up 27% in the past year, and Cisco is down 7%. And in what has become an unfortunate pattern, the stock tanked after its earnings report (for the fourth consecutive time).
The decline is warranted. While revenue rose 6% year-on-year, margins compressed to 62.4% on a non-GAAP basis (R&D costs rose 19% and marketing costs rose 15%). And while, according to CEO John Chambers, the “strategy of tightly integrating our multiple products through an architectural approach is working, and we are delivering innovation in each major product family”, the company is losing market share in switches and routers.
The reality: “Cisco may be suffering from a bit more than a temporary drop resulting from some ‘air pockets’” (MarketWatch).
Now, there was a reason for the stock to be hammered, but there is a fine line between hammered and over-punished. And with the stock dropping over 13% following their earnings, it is looking oversold.
While this sell-off could represent a short-term buying opportunity, that opportunity would be very short term.
As I wrote last fall:
…the company has faced setbacks in the past and managed to prevail, but today its growth potential is challenged. While Cisco is a good company… I don’t consider the stock a good growth opportunity.
I didn’t view Cisco as a solid long-term investment last year, and I still don’t.