Cisco Thinks Internet-of-Things Can Be as Dominant as the Internet Itself

Cisco Thinks Internet-of-Things Can Be as Dominant as the Internet Itself

NEW YORK (TheStreet) — John Chambers, long-time CEO of Cisco Systems, delivered his final earnings call Wednesday after the market close. And like the confident CEO he has always been, he reminded investors that he’s leaving the company in much better shape than when he assumed the role two decades ago.

“As 50 million more devices come online, we have a strong hand to play, and we are playing,” Chamber said, referring to the Internet-of-Things (IoT) — Cisco’s next growth opportunity.

Cisco stock closed Wednesday at $29.35, up 0.41%, ahead of its fiscal third-quarter results. The shares are up 5.52% on the year, besting the broader market. And even though the shares are up almost 30% in the past twelve months, concerns remain about “what’s next?” That’s something Chambers has long addressed — that is, if you’ve been paying attention.

Jim Cramer pays attention. In a recent commentary he noted, “Cisco’s doing terrifically in what arguably is a very tough moment for pretty much every international — chiefly emerging — market that it has dominated.” Cisco is a holding in Cramer’s charitable trust, Action Alerts PLUS.

Granted, the San Jose, California-based firm is no longer achieving the sort of growth rate it managed when it dominated the tech landscape as the world’s largest company. Still, Chambers has invested most of the past three years positioning Cisco to secure its place in the Internet-of-Things, which research firm IDC estimates to be a $1.7 trillion market in 2015. Nearly 15 billion devices will be connected, predicts IDC.

But Cisco has bigger ambitions, and suggests that 99.4% of devices that could be connected to the Internet are not yet connected. In its vision of the future market — called the Internet-of-Everything — that’s an untapped $14.4 trillion opportunity.

To that end, Cisco is at “a very positive inflection point,” noted Chambers. Just as it bet big and won in the Internet’s growth phase, Cisco is again betting on the long-term with the IoT. And Chambers, after recently promising IoT will help Cisco become the world’s No. 1 IT solution provider, has done more than enough to step aside with his head held high.

As he leaves, investors have a lot to be encouraged about, including the rate at which Cisco continues to buy back its stock and raise its dividend.

During the just-ended quarter, the company bought back some 35 million shares of stock, spending roughly $1 billion. And that’s on top of its 21-cent quarterly dividend that yields almost 3.00% annually.

Sure, its core routing and switching business has been losing some steam in the past several years. That’s in part because Cisco, which still holds the largest market share among computer networking vendors, wants it that way. Instead, Cisco is focusing more on products and services — particularly the type that are tied to data centers, wireless networks and security.

Not only have these services become strong revenue producers, helping the company hit sales of $12.14 billion for its third quarter (versus estimates of $12.07 billion), these segments also have higher margins. And with fiscal third-quarter adjusted EPS coming in a penny better than estimates at 54 cents per share, the strategy is working.

Cisco’s execution is also working, but its stock continues to fly under the radar. Trading at just 17 times earnings, it is discounted four points to the S&P 500. If the shares were trading at par with the average for the index (and adjusting for its buyback and dividend), Cisco shares would today be 18% to 20% higher, around $35. Factor in Cisco’s 3% yield, and you have an stock worth holding until the markets recognize its real value.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
May 20, 2015 / by / in , , , , , , ,

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