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Cisco: Growth is “Off the Table”

Cisco’s previous long-term annual revenue growth target of 12-17% is now “off the table”, according to CEO John Chambers. 

And growth won’t be back on the table anytime soon.  According to last week’s earnings report, while sales gained 4.8%, profits dropped 18%.  What’s more: the company announced it expects this quarter’s revenue growth to be up 2% at best…if not flat. 

Not that a disappointing earnings report is any surprise.  This is just the latest in a string of reports that have left the market unimpressed, and left the stock in a slump.  And it’s hardly any wonder that a recent MarketWatch article named Cisco as one of a few Dow components experiencing a “slow death spiral”.  That spiral has left shares down 34% in the past year, while tech is up 23%.  And that translates to a loss of something like $50 billion in market share for the company last year.

And Cisco knows its spiraling down.  Chambers makes “no excuses” and said the company “must adjust quickly”.  And that means refocusing on its core routing and switching (last month production was stopped on the Flip camera, which amounted to 550 jobs cut).  And it means cost cutting: the company plans to trim expenses by $1 billion in the next year.

The bottom line: Cisco is the worlds largest networking equipment maker, but it has gotten “lazy and bloated”, according to MarketWatch.  But getting lazy and bloated doesn’t happen overnight.  To put it simply: “Cisco was a stock star in the 1990s and has been dead money ever since the dot-com crash” (Forbes).   From ‘stock star’ to ‘dead money’ is right: from May 1991 to December 1999, shares rose 33,991%.  And over the past decade the stock is down 11%. 

Keeping with the trend, last week’s earnings report resulted in a sell-off .  The sell-off is somewhat overdone, but I would not look at this as a buying opportunity, because I don’t consider Cisco a buying opportunity at any time.  Granted, valuations look alright, but the stock has had a confirmed sell signal since last summer, and is in a well established long-term downtrend.

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