For years, Credit Suisse’s Kulbinder Garcha has been raising red flags about Cisco and the growing softness in its main business, computer network equipment.
But this week, he’s done a complete 180 and become a Cisco believer.
He upgraded the stock two levels from essentially a sell (an “underperform”) to a buy (“outperform”) and raised his target price to $40. Cisco has been trading at around $34 all month and the stock languished below $30 for many years.
Garcha has been warning investors for a long time that Cisco is facing an upswing in competitors these days as companies rethink the way they build networks. And he still believes the company is under that gun.
Companies are moving more of their stuff to cloud computing, where they rent the IT they need hosted elsewhere and so need to buy less IT products themselves. Plus, there’s a newfound emphasis on using cheaper network hardware and giving all the important tasks to newfangled network software, possibly bought from two different vendors.
As such, Garcha grew alarmed at how Cisco lost market share.
“We see that CSCO share has come down in DC switching segment from 70% to around 50% since 2013,” he wrote. “The major pressure for Cisco has been share loss and move towards big 7 Cloud providers. We have continued this and assume that Cisco’s share will drop even further to about 33% of the market long term.”
But as dire as that sounds, there’s a silver lining, Garcha believes. He thinks Cisco CEO Chuck Robbins is making good on his strategy to remake the company into a software business with recurring revenues from lots of products in lots of markets other than networking. A case in point is the recent purchase of AppDyamics, a company that monitors how apps perform.
Networking products like routers and switches have historically been Cisco’s bread and butter, although it also sells security equipment, and collaboration services like WebEx.
Plus, if the Trump administration makes good in its pro-business tax cut promises and allows companies to bring back their overseas stash for little to no taxes, Cisco will be rolling in dough. It has more than $75 billion overseas, says Garcha.
“In terms of what they might acquire, looking at every one of ~45 deals in the last 5 years, 71% have been software. Management really emphasizes the need to buy recurring revenue business in the area of security, iOT and Cloud,” he says.
The upshot is that the future for Cisco as a software company is looking bright, even to this long-time Cisco bear.
“We believe that the company is assembling a portfolio of businesses, which should allow it to produce low single digit revenue growth and continued operating leverage even in a dire scenario for switching.”
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