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Cisco Had a Rough 2020. Here’s How the Stock Could Rebound in 2021.

The pandemic has proved to be a headwind for Cisco.

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With the year almost over, we’re taking a look at all 30 stocks in the Dow, starting with the worst performers— Boeing and Walgreens Boots Alliance —and working our way up to the highest-flying stock in the benchmark— Apple. The ranking may shift before the close of 2020 trading, but the stories behind the stocks shouldn’t.

It was a disappointing year overall in 2020 for shareholders of Cisco Systems, with some hints of better times to come for the networking giant in the year’s final weeks.

Cisco shares (ticker: CSCO) were left out of the 2020 tech stock rally, on track to end the year down almost 7% from where they started, and underperforming the Nasdaq Composite by 37 percentage points. The primary reason boils down to this: Cisco has stopped growing. In the fiscal first quarter ended Oct. 24, revenue was down 9% and non-GAAP net income was off 11%. And that was actually better than expected.

Without a doubt, the pandemic has proved to be a headwind for Cisco, as it was for other legacy tech companies that still rely significantly on selling products and software to the data center. Belts tightened at businesses large and small, and companies shifted IT budgets toward the cloud.

Cisco long ago recognized this problem, and in fact has ramped up its push to boost its proportion of revenue tied to software and subscription models. The latest quarter’s results showed some progress—and highlighted the challenge.

CEO Chuck Robbins told Barron’s after the latest earnings announcement that while the quarter wasn’t great mathematically, it was “better than we thought.” And, in fact, there were signs of strength in the quarter in Cisco’s WebEx videoconferencing business (although the company doesn’t break out its revenue from that business), in security products, and even in campus networking. But revenue from the core infrastructure-platform business was down 16%, enterprise orders were down 15%, and orders from Asia were off 14%.

Cisco broadly benefits from the “digital transformation” trend that IT wonks continually talk about—digital equals data, data travels on networks, and Cisco provides the hardware that companies use to build out those networks. But the broad trend isn’t quite enough. Buying Cisco here is a twofold bet—that the company can shift more business to cloud-based businesses, and that IT spending will pick up in 2021.

Write to Eric J. Savitz at [email protected]

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