While Cisco’s road to nowhere took many years of mismanagement led by a once heralded and revered CEO, the company’s road to acceptance only started in November with Chambers' now infamous “air pocket” comments. This was Chambers' first steadfast denial that things were awry at the company -- even though, as I wrote at the time, it was obvious that more than just air pockets were impeding Cisco’s progress. While Tuesday’s announcement and acceptance of the problem mark the beginning of a possible turning point for the company, it could take years for Cisco to get back on track.
Cisco’s issues are deeper than consumer business
Cisco’s foray into consumer products was poorly managed and ill-timed, but the decline of this business should be the least of Cisco’s worries. The company’s consumer business only accounted for 2%-3% of total bookings in its most recent fiscal quarter, so dumping the business won’t have a significant effect on Cisco’s top line growth. However, as Cisco’s focus and direction skidded off the tracks as it looked to develop these smaller niche units, more dexterous competitors were stealing market share in its core businesses.
Chambers' decision to provide end-to-end datacenter computing solutions created enemies out of former friends IBM
Some of Cisco’s recent struggles to grow revenue can also be due to the company’s overdependence on public sector spending. Apparently, Chambers and company thought that well would never run dry.
While Cisco’s biggest position of strength is its enormous cash and short term investment balance of more than $40 billion, I don’t believe acquisitions hold the promise they once did for the company. A huge possible acquisition of EMC
In fact, much of Cisco’s growth has been fueled by strong and strategic acquisitions. While the company has continued to make small acquisitions to supplement its ever growing portfolio of businesses, significant purchases seem to be a thing of the past. That being said, realistically, the company might be better served as a somewhat smaller, agile, and more focused company to compete more effectively with some of its competitors that have been chipping away at Cisco’s market share.
A longer row to hoe
Acceptance and acknowledgment that change is needed at Cisco was a big first step for John Chambers, and eliminating the consumer unit was another important -- if very small -- decision. Unfortunately for Cisco shareholders the years of attempting to build out non-complementary businesses will take time to unwind.
Cisco’s shares have gotten much cheaper as the company has waddled through the last year, but I still don’t think that makes it a value. Value doesn’t really matter much if growth doesn’t seem to be on the horizon, and Cisco may be better served to actually step back a bit before it can move forward.
In addition, if you like the world of cheap, big, old, and stodgy tech companies look no further than Intel, Hewlett-Packard, and Microsoft, which all trade at a discount to Cisco when looking at the enterprise value/EBITDA ratio. I say let the vanilla mutual funds continue to load up on these stocks and look elsewhere. There are better values accompanied by growth to find in the market.
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Andrew Bond owns no shares in the companies listed. Riverbed Technology is a Motley Fool Rule Breakers recommendation. Intel and Microsoft are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Intel. Motley Fool Alpha LLC owns shares of Cisco Systems and Microsoft. Motley Fool Alpha LLC has opened a short position on Juniper Networks. Juniper Networks is a Motley Fool Big Short short-sale pick. The Fool owns shares of Intel, International Business Machines, EMC, and Microsoft. The Fool has bought calls on Intel. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.