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Cisco Is Half-Right to Kill the Flip

By Rich Smith - Updated Apr 6, 2017 at 10:26PM

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And it can afford to be half-wrong.

Cisco Systems (Nasdaq: CSCO) flipped the switch Tuesday. Responding to criticism of its flailing entree into consumer electronics, the company announced it will "restructure" CE. Cisco will:

  • Integrate its controversial (-ly priced) umi home videoconferencing product into its existing "Business TelePresence" line.
  • "Assess" its core video technology for integration into other businesses "or other market opportunities" (read "sell the business").
  • Kill the Flip video recorder.

Kudos, Cisco
As I argued last month, this is the right move for Cisco -- sort of. Recall: The whole idea behind buying Flip (and developing umi, and building a wireless stereo, rushing heedlessly into competition with Apple (Nasdaq: AAPL), Research In Motion (Nasdaq: RIMM), and Hewlett-Packard (NYSE: HPQ) with its Cius tablet concept) was that Cisco wanted to support the use of Internet video.

Logically, this would inspire Internet providers to buy more switches, routers, and other doo-dads from Cisco to support all the extra traffic. Where Cisco went wrong was in forgetting that Apple, RIM, and HP already make products that support this need. That (Nasdaq: AMZN) and Netflix (Nasdaq: NFLX) already offer services boosting bandwidth demand. That, in short, there was no need for Cisco to be in CE at all. Now this fact has dawned on Cisco, and it's killing Flip -- which is so close to the right decision, it's painful to watch.

What Cisco should be doing, of course, is selling Flip to someone who might make a profit off the product -- Sony (NYSE: SNE) or Apple, perhaps -- and riding that player's coattails. Or selling to someone who probably won't make a profit, but has a history of paying up for bad ideas (I'm talking to you, HP).

Instead, Cisco's killing Flip and recording a loss that it claims won't exceed $300 million -- which isn't even close to the truth. In fact, Cisco paid $590 million to acquire Flip two years ago, and unless the company decided to kill Flip because it's embarrassingly profitable, I doubt it earned the $290 million needed to make up the difference between what Cisco paid, and what it's now writing off as a mistake.

Foolish takeaway
So Cisco's really only half-right -- but there's good news here for investors, too: At an enterprise value less than eight times the amount of cash it churns out in a year, and a forward growth rate of 10.4%, Cisco can afford to be half-wrong. Yes, Cisco tripped over Flip. But the stock is a good value regardless.

Want to keep track of Cisco's efforts to right the ship? Add it to your Watchlist today.

Fool contributor Rich Smith has no position in any stocks named above. The Motley Fool has a disclosure policy.

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Cisco Systems, Inc. Stock Quote
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HP Inc. Stock Quote
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Netflix, Inc. Stock Quote
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Apple Inc. Stock Quote
Apple Inc.
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Sony Corporation Stock Quote
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