A lot of my other favorites have made a move, but Cisco Systems (Nasdaq: CSCO) has been annoyingly immobile forever now. It stays between $20-$22. It is just giving people numerous opportunities to enter. A lot of stocks I have looked at do nothing, but when they finally move they move fast. It might finally be on the move now, but there have been fake outs before. Cisco has not moved yet, but holding it is not a total loss, either.
The Present State of Affairs is Amenable to the Patient Soul
The heading is purposefully absurd. I have only looked at recent snapshots of Cisco, but the $20 problem is almost a decade old. It is understandable though, because the company is not a growth stock. It should not try to become a growth stock. Some parts of the market would like to see someone new at the top, but I would rather not take sides. I see upsides and downsides to a management change, and I do not think an effort to shake things up will yield much fruit.
Cisco has a 2.70% dividend yield. That is not fantastic, but it is better than being stuck at $20 and not getting anything in return. The dividend is not as old as the $20 problem. Cisco is the only networking company to offer a dividend. Juniper Networks (NYSE: JNPR) does not offer a dividend. Juniper is busy looking for ways to increase revenues and profits. It is not in a position to give a dividend. It is in a stable position.
The majority of Juniper’s revenue comes from core routers, and now there is a new entrant into the market that could eat away at market share somewhat. Alcatel-Lucent (NYSE: ALU) with its new extensible routing system, aka core router, has the potential to do a lot of damage to Juniper. Not to say that the damage will save Alcatel-Lucent. It could be a case of ALU hurting JNPR, but not doing well enough to save itself.
Cisco has a more diverse source of revenue. ALU has a more diverse source of revenue, but it does not have profits so diversity doesn’t matter as much. Cisco is focused on natural extensions to its core business. It is more of an enterprise provider when it comes to routers. It sells to enterprises, which makes it less reliant on core routers. It is very dominant in edge routing, and has other businesses as well.
Cisco has over $45B in cash, with around $16B in debt. That debt seems scary, but considering the cash it’s no big deal. Juniper has over $2B in cash and around $1B in debt. ALU’s cash position is deceptive. It has $5.8B in cash and $5.7B in debt, but the reality is worse than that. ALU has about 2-3 years to get itself right and start making enough money to pay off its debts. It will not have money to service debt and keep operations going after 3 years, though most likely 2.
The Future is Foggy, Ask Again Later
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Nice New Router System
It may not be obvious right now what Cisco will do, and it might come out of the blue. I do expect Cisco to do something eventually. The company is clearly not in a rush. It is busy creating the LTE small cells. Cisco already has 3G and Wi-Fi small cells, but LTE has not been released yet. At least as far as I can tell. I see a small cell gateway, but no actual cells. If it exists, then it is just an early demo and not a product going to market. I still have not seen much information regarding it, other than the promise of development from last year. Alcatel-Lucent already has a great product to market in lightRadio, but the market is still waiting on it to get deeper into the market and provide serious revenues. Earnings calls discuss lightRadio only briefly so it must not be an important part of business yet. Alcatel-Lucent is still years ahead of Cisco development-wise.
With over $45B in cash you know that Cisco can buy its way into something new if it wanted. It seems content to sit back and have its internal technologies for now. I have not seen any major acquisitions, meaning billions not millions, that will take the company in a new direction. I consider this a positive, but people hungry for the days of rapid Cisco growth will be disappointed.
LTE small cells will be a nice addition, but it will not be the explosive innovation. Neither will Cisco’s cautious entry into software-defined networking. Cautious because it covers many bases. Cisco is maintaining its focus on the importance of its hardware, while the hype downplays hardware. SDN is still in the early stages so do not get too hung up. Cisco will realize that it needs to do something to get ahead of the curve instead of behind or on it. The large cash position will help it act quickly and decisively when it chooses to.
The only new thing I have seen from Juniper is their purchase of Contrail. I doubt the company had much in the way of development accomplished, but Juniper at least got the expertise of all the employees. Contrail was very new, and products take years to develop. It will be a while before anything comes of that acquisition if anything ever does.
Conclusion
I prefer Cisco over Juniper. In addition to Cisco, I would take a chunk of Alcatel-Lucent. That way you have the safer champion, and the bleeding underdog. Alcatel-Lucent has its lightRadio system, and its new core router. There are some other products, but these are some of the newest and most impressive. ALU is a company trying to use innovation to dig itself out of its hole. I have surveyed the technology and I think it stands a shot. I think both Cisco and Alcatel-Lucent are a buy.
Additional Riffing:
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I really think Cisco is a good stock to invest in. They are working on a lot of things, but right now I feel like they are being exceptionally cautious. It is trying a lot of different things like its own brand of software-defined networking. I have not read too much about it, but here I will add that it seems Cisco’s path looks like it might end up being popular compared to VMWare’s variety. At least at first. I never expected that they would be head to head competitors but the article I read in passing made it seem that way. I am not digging it up though. Riffing is just that. Its my thoughts, and I am not going to jump through a bunch of hoops. The article stands alone, this is almost like editor’s footnotes, but from the writer.
SDN is also five years out, or more. The delay in the technology is why I find Juniper’s Contrail acquisition so perplexing. I knew Juniper was a first round funder (know might be strong, I heard from people who work in networking), but if the technology is so far out there does not seem to be any reason to take the company now. It should take a large stake, and let the company grow as a start-up. Now that it is part of Juniper it is more restricted in structure. The benefit of start-ups is that they can innovate at a rapid pace compared to larger organizations. I do not think Contrail had anything useable other than expertise. If you know better please leave a comment.
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