The massive sell-off in shares of Cisco
The "air pockets"
Chambers said on the call, "First of all, our view on this guidance is we're disappointed. This is something that if we were to look back just a quarter ago, we expected it to be in the midteens or higher, and that's what I think our growth rates should be. If you look, we've got a couple of air pockets that we hit. You adjust to those air pockets as you go through in terms of the direction."
No growth from acquisitions
It's not all bad as Cisco did still turn in revenue growth of 19% from last year, and it has the aforementioned boatload of cash that buoys its balance sheet. But it is troubling that the company has not been able to put that cash to work. We continue to hear how much cash U.S. companies have on their balance sheets, but many of Cisco's competitors have been putting it to good use through strategic acquisitions. Oracle
During the quarter, Cisco made just two small acquisitions despite having nearly $39 billion of cash and cash equivalents on the company's balance sheet. The company did spend $2.7 billion on share repurchases during the quarter, so it appears that Cisco likes itself more than it does other faster-growing companies.
I don't think Cisco needs to go on an M&A rampage in order to keep up with the Joneses, but it certainly does not want to be left behind. More than anything, it would be nice if the company could establish some direction, especially now that governments won't be providing the same earnings cushion.
Cisco has tried to increase its earnings from other sources that are also under pressure. The company's foray into the teleconferencing sphere is now seeing intense competition and revenue cannibalization from low-cost competing solutions. So what does Cisco do? It introduces the Umi, the company's first significant thrust into consumer teleconferencing. At $600 a pop on top of the $25-a-month subscription fee, I bet thousands will be lined up to buy the Umi as soon as they sign off from their free Skype session. Rumors of a potential acquisition of Skype have been circulating, which would certainly make a lot more sense in boosting Cisco's capabilities, as well as adding a fast grower to the mix.
In addition, the curious 2009 acquisition of Flip camera maker Pure Digital seems to veer off in another direction of which Cisco is not even sure. Apple's
Cisco isn't going away anytime soon, and you can even argue that the stock is trading at a relatively nice discount right now. But I'm hard-pressed to find a reason to invest in a company that should struggle to find organic growth now that it has created networking enemies out of former partners and has a recent track record of dubious acquisitions coming under fierce competition. If you like this space, look at companies, such as F5 Networks, that are growing rapidly and gaining market share. Maybe Cisco will find a way to accelerate growth again, but until it does, there are too many other places to park your money.
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Andrew Bond owns no shares in the companies listed. Apple is a Motley Fool Stock Advisor recommendation. Intel is a Motley Fool Inside Value selection. Motley Fool Options has recommended buying calls on Intel. The Fool has written calls (bull call spread) on Cisco Systems. The Fool owns shares of Apple, Intel, International Business Machines and Oracle. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.