Cisco is Undervalued and Ready to Move Higher

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Cisco Systems' (NASDAQ: CSCO) price is virtually unchanged versus this time last year, despite the fact that the company has seen between 7% and 10% revenue growth. Its net income is up almost 25% year-over-year, with earnings per share of almost $1.50. Revenue and income are both up for this year, and Cisco seems to have found stable growth that will continue into the future. With a price to earnings ratio around 12 and a 3.1% dividend yield, it's clear that Cisco is undervalued.

The company has announced a few new products that will keep it in the forefront of internet-based networking. It recently announced the introduction of the Nexus 1100 series. This is the foundation of Cisco's customers' virtual networks, allowing management to control all networks from a single location. It has also recently introduced the Nexus 3548 - which is designed to boost customers' network performance.

The market for Ethernet switching is still growing, and Cisco is second to none in this almost $20 billion a year market. Hewlett-Packard (NYSE: HPQ) is Cisco's closest competitor, but Cisco still claims almost two-thirds of the market, while HP claims less than 9%. Cisco is also increasing market share and is the undisputed leader in the sector, both now and in the future. As this market continues to grow Cisco will see revenue and profit growth along with it.

While Cisco will continue to see positive growth in the Ethernet switch market, it sees even bigger potential in building data centers for cloud computing. I have heard people say Cisco is in trouble in this crowded market because of companies like (NYSE: CRM). This company is enjoying growing market share in the arena and has become a hot buy. But focuses much more on the software end of the cloud market, while Cisco is focused more heavily on the hardware end. This focus on the hardware side of the market will help differentiate Cisco going forward in capturing a healthy share of this growing market.

Other competitors like Oracle and HP are taking the approach of competing both in the software service arena and the hardware products side. I like Cisco's approach of focusing on one end and being the leader. This will lead to Cisco gaining a share of the cloud services hardware market comparable to its leadership position in the Ethernet switching market. Going forward, this will produce huge growth for Cisco.

The Nexus 3548 will also help in the business enterprise market. Competitor Equinix (NASDAQ: EQIX) has seen huge growth in its stock price largely due to its data centers in the financial markets. The 3548 10 GB Ethernet switch is capable of latencies as low as 190 nanoseconds, or 190 millionths of a second. This will be very attractive to high frequency stock market traders. The Nexus 3548 will make it possible for algorithmic traders to connect to any trading venue they like without increased latency. Dominance of the financial sector business enterprise market is exactly what has fueled Equinix's 120% growth in stock price over the last two years. Cisco's new technology is vastly superior to what Equinix offers and will lead to tremendous growth for Cisco over the coming years.

What is even more impressive is the potential for Cisco to not only continue its growth trend but to exceed it. The hardware market for data centers will continue to see double digit growth for the next year. This bodes well for Cisco. Internet usage will continue to grow as well, which is more good news for Cisco as users will need the hardware capabilities for internet access.

Another factor going forward that makes Cisco attractive is research and development spending. In 2011 Cisco spent almost $6 billion on R&D. This places Cisco's R&D spending above its competitors. For example, in 2011 HP spent about $3.3 billion on R&D while Juniper spent about $1 billion. Spending money on research and development will only help Cisco into the future, and is another factor that makes it a very attractive stock going forward.

Cisco is showing that it is not afraid to refocus and meet the demands of a changing marketplace. It recently announced completion of a 100G technology test with MegaFon, one of Russia's leading mobile operators. I believe this is great news going forward as it shows that Cisco can match up different manufacturer's products across the world and still result in cutting edge technology. This will lead to expansive growth opportunities in the coming years, and shows that it can now be a leader in integrating that technology around the world.

Cisco management has recently shown a desire to streamline its business operations. It has shed its Flip camera devices as well as television manufacturing plant in Mexico. The goal is to shed a total of $1 billion in expenses and emerge as a leaner, more focused Cisco.

As was pointed out, Cisco's core Ethernet switching and routing business remains very strong and will continue to grow into the future. Cisco has also seen significant growth in its high end Unified Computing System, particularly among universities. This is further indication of a strong future and one that shows Cisco is committed to competing in the area of cloud technology.

Cisco is one of the strongest investments in the market. It has consistently shown stable forward growth, and has consistently produced enhancements to its business that allows it to be a competitive force in the constantly changing technology field. I expect to see further growth for the next several years, with the stock hitting $20 in 2013 and $25 in 2014.


StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has the following options: short JAN 2013 $150.00 calls on and long JAN 2013 $150.00 puts on Motley Fool newsletter services recommend Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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