Please ensure Javascript is enabled for purposes of website accessibility

Cisco Is Half-Right to Kill the Flip

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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 Amazon.com (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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$42.60 (-0.09%) $0.04
HP Inc. Stock Quote
HP Inc.
HPQ
$31.87 (-2.78%) $0.91
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$179.95 (2.90%) $5.08
Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$109.56 (3.15%) $3.35
Sony Corporation Stock Quote
Sony Corporation
SONY
$81.68 (-0.11%) $0.09
BlackBerry Stock Quote
BlackBerry
BB
$5.45 (1.11%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.