Why Is Cisco Systems Inc. Soaring Today?

Sometimes even the biggest market moves of the day make very little sense. Here's one example courtesy of Dow component Cisco Systems.

Apr 1, 2014 at 2:00PM

This is just a friendly reminder: market moves don't always make sense. Not even the big ones.

Case in point: Cisco Systems (NASDAQ:CSCO) is far and away the largest gainer among the 30 Dow Jones (DJINDICES:^DJI) stocks today. The networking specialist's shares are up 2.9% and 5.9% over the last week, easily besting the Dow's 0.3% and 1.4% gains, respectively.


Source: Google Finance.

Cisco doesn't have any massive, game-changing news of its own today. Really, you might expect the stock to suffer a bit when the company's biggest headline on the day was a reiterated sell rating from analyst firm Credit Suisse. We'll get back to that pessimistic analysis in a minute.


First, let's have a look at Cisco's actual catalyst, an industry-wide tide that is lifting all the major networking boats. Alcatel-Lucent (NYSE:ALU) is up 3.1% and Juniper Networks (NYSE:JNPR) climbed 2.5% higher.

This green tide rests on last night's fourth-quarter report by Chinese rival Huawei.

Huawei is shifting its focus from maximum revenue growth to stronger profit taking, which leaves breathing room for Western competitors in an increasingly cramped global networking market. So there's plenty of reason to take non-Huawei networking stocks up a notch on this news.

However, Cisco happens to be a special case. Huawei is taking market share from Alcatel, Juniper, and Cisco in pretty much every submarket, but the Chinese company has an extra large foot in the door of enterprise-class data centers.


Image source: Cisco Systems.

That's Cisco's strongest traditional market, and even a slower-growing Huawei could pose a serious threat to Cisco's core profit center here. Remember the Credit Suisse report that I promised to get back to? The firm pointed out that software-defined networking products are digging into Cisco's enterprise market as well. Even if Cisco successfully moves over to SDN products before it's too late, that model carries inherently lower margins and the company's profits are likely to erode.

So even the industry-wide tidbit that is driving other networking stocks higher contains a bit of bad news to undermine Cisco's surge. On top of that, there's a bit of unique bad news just for Cisco.

And yet the stock is soaring. Mr. Market forgot to put on his thinking cap this morning and is focusing on all the wrong things this time.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days.

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