Cisco 's (NASDAQ: CSCO) 14% rally this year seemed decent for a "mature" tech company, but it still trailed the S&P 500's 16% gain. Cisco might eventually catch up by the end of the year, but its fiscal 2017 was still mostly a year to forget for its long-term investors. Let's look back at the five major factors that weighed down the networking hardware giant's stock this year.
1. Stagnant growth
Cisco posted a 3% sales decline, or a 2% drop after excluding the sale of set-top box business, in fiscal 2017. Its net income fell 11%, and its EPS -- barely lifted by buybacks -- slumped 10%. Looking ahead, analysts expect Cisco's revenues to stay flat this year, and for its earnings to rise less than 2%.
Image source: Cisco.
Cisco's growth is throttled by ongoing declines in its core businesses of routers and switches, which together generated 45% of its sales in 2017. Routing revenues dipped 4% and switching revenues fell 5% due to the heavy saturation and commoditization of both markets.
2. Market share losses
Cisco is the largest maker of routers and switches in the world, but it's losing ground in both markets. IDC's latest numbers show that Cisco's global share of the switching market fell from 56.8% to 54.7% between the second quarters of 2016 and 2017. Its combined service provider (SP) and enterprise router market share also dropped from 44.8% to 41.2%.
Meanwhile, its competitors gained ground. Huawei 's share of switches jumped from 6.5% to 8.5%, and its share of SP and enterprise routers grew from 18.9% to 25.2%. Juniper 's (NYSE: JNPR) share of switches rose from 3.5% to 4.3%, although its SP and enterprise router share dipped from 15.7% to 14.6%.
Arista Networks (NYSE: ANET) , which produces cheaper switches and open source software for generic " white box " networking hardware, saw its share of switches rise from 3.9% to 5.5%. Those figures highlight Cisco's growing need to aggressively diversify into new businesses.
3. A slowdown in its higher-growth security business
Many Cisco bulls believed that the growth of its security business -- which includes products obtained through its acquisitions of ThreatGrid, Sourcefire, and other companies -- would lift its top-line growth again.
The idea was that Cisco could bundle these security solutions with its hardware and software products as add-on services, which would help it steal market share away from stand-alone players like threat prevention company FireEye and next-gen firewall provider Palo Alto Networks .
However, FireEye, Palo Alto, and other stand-alone players kept growing, indicating that enterprise customers were more interested in "best in breed" solutions instead of cheaper or more convenient bundles. As a result, the growth of Cisco's security business decelerated, ending the year with just 9% sales growth -- compared to 13% growth in 2016.
| || |
Revenue growth of Cisco's security business. Source: Quarterly reports.
4. A lack of inspiring acquisitions
In 2017, Cisco bought or announced plans to buy eight companies. But none of those acquisitions really moved the needle. The acquisitions of AppDynamics, Saggezza's Advanced Analytics Team, Mindmeld, Observable Networks, and Perspica should all improve Cisco's AI and analytics capabilities, but it's unclear if those purchases will sufficiently widen its moat against the cloud-based SDN (software-defined networking) solutions championed by Arista Networks.
Cisco is also buying BroadSoft (NASDAQ: BSFT) to strengthen its collaboration business, but that market is also crowded with heavy-hitting competitors like Microsoft and Amazon .
5. Most of its cash remains overseas
Cisco finished last quarter with $70.5 billion in cash and equivalents, but just $3 billion of that total is in the US. The bulls believe that if the Trump Administration successfully lowers corporate tax rates from their current 35% rate, Cisco will repatriate some of that cash for buybacks, dividends, or domestic acquisitions.
However, the proposed reduction to 20% -- which is already a tough sell -- probably won't be enough to convince companies like Cisco to bring their cash home. That's because a lot of Cisco's cash sits in Ireland, which has a corporate tax rate of just 12.5%, and other low-tax countries.
The bottom line
Cisco's stock is fairly cheap at 14 times next year's earnings, and it pays a decent forward dividend yield of 3.4%. That low multiple and high yield should limit its downside potential, but it's also unlikely to soar higher anytime soon.
10 stocks we like better than Cisco Systems
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Cisco Systems wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of October 9, 2017
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Amazon and Cisco Systems. The Motley Fool owns shares of and recommends Amazon and Arista Networks. The Motley Fool recommends Cisco Systems, FireEye, and Palo Alto Networks. The Motley Fool has a disclosure policy .