Is Cisco Doomed?

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To hear optionMONSTER tell it, the outlook for Cisco Systems (Nasdaq: CSCO  ) is "grim."

Earlier this month, the stock fell as far as $13.30 before pulling out of its nosedive following a powerful Aug. 11 earnings report. Fast forward just a few weeks, though, and oM argues that the shares are looking vulnerable once again: "January 2012 10 puts led the option action, with 24,000 changing hands against open … interest of just 7,265 contracts. The big block of 23,400 was bought for $0.24, above the ask price at the time, which indicates that they were bought."

Puts, as you know, are a form of option that traders use to short a stock while limiting their risk from an "upside surprise." And the way oM sees it, this rapid rise in short interest against Cisco bodes ill for the company's next earnings report. To which I can only reply:

What's the rush, optionMonster?
I mean seriously, folks, Cisco just got finished reporting earnings. Strong earnings. While Juniper (Nasdaq: JNPR  ) , Riverbed (Nasdaq: RVBD  ) , and Brocade (Nasdaq: BRCD  ) were floundering, Cisco "made significant progress" on repairing its business, and reaped the rewards. We've got nearly three full months left before the company has to belly up to the bar and report earnings again. Do we have to start biting our fingernails already?

Actually, no. Options trading may be fine for short-term traders, and in the short term, Cisco skeptics might even be proven right (although the stock's climb since Friday suggests otherwise.) Longer-term, though, I still see Cisco as a bargain. The stock only costs 13.3 times earnings, after all, and less than 10 times free cash flow. Analysts have Cisco pegged for nearly 10% annual growth over the next five years, and the company even pays a tidy 1.6% dividend. To top it all off, nearly one-third of Cisco's market cap is currently backed up by cold, hard cash.

My advice: Stop worrying. Stop trading. Cisco is doing just fine, and if you own it, you will, too.

Will Cisco disprove the skeptics? Add it to your Fool Watchlist and find out.

Fool contributor Rich Smith does not own or short any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 429 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Riverbed Technology, as well as writing puts in Riverbed Technology. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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  • Report this Comment On August 31, 2011, at 1:00 AM, BradReeseCom wrote:

    Hi Rich,

    Is Cisco Doomed?

    Of course not.


    Because Cisco has plenty more market share to lose, for example:

    Huawei is one of the culprits behind Cisco's -22.4% decline in IP edge revenue share.

    Earlier this month I was treated to lunch on Wall Street by a global technology titan that has more than 4 times the revenue of Cisco.

    Naturally, our topic of discussion was Cisco.

    But what surprised and shocked me the most was just how frightened this global technology titan was of telecom network equipment provider - Huawei.

    I mean, this global technology titan fearfully admitted to me that once Huawei entered a market, that market's future profitability for this global technology titan was near an end, meaning, it can't profitably compete against Huawei.

    Alarmingly (at least in my opinion), Michael Howard - principal analyst for carrier networks at Infonetics Research, revealed in his new report last week:

    Huawei is one of the culprits behind Cisco's -22.4% decline in IP edge revenue share:

    "Alcatel-Lucent, Huawei, Juniper and even ZTE continue to take market share from Cisco in the critical IP edge segment (the sum of IP edge routers and carrier Ethernet switches). Cisco is actually doing really well, with global IP edge revenue up 12% in the second quarter of 2011, and still commands close to a third of the worldwide market.

    "The problem is that Cisco's competitors are growing faster: Huawei's IP edge revenue grew 66% and Alcatel-Lucent's 22% in 2Q11.

    "Over the last year and a half (1Q10 to 2Q11), Cisco's IP edge revenue share declined from a high of 41.5% to 32.2%, while its closest competitors gained between 2 and 5 percentage points of share."

    Howard continued, "Alcatel-Lucent and Huawei have end-to-end portfolio solutions for broadband and mobile networks, and, according to our surveys, many service providers see Juniper and ALU as offering competitive technology at a better price point.

    "Meanwhile, ZTE is growing in the mobile space, particularly mobile backhaul. For these and other reasons, these manufacturers are winning big deals in the IP edge space and gaining on Cisco."


    Brad Reese

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