networking

Cisco, the once behemoth that it was in the 90’s and early 2000’s, has been somewhat of a laggard, but that is all about to change. The company has some distinct advantages, such and owning and managing quite a bit of software and hardware already, with annual sales north of $49 billion, (I mean come on, just another billion to get to a nice round $50 billion), and a 74,000 employee count.


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Recently released SEC documents point to a new core focus, bringing it back to the Cisco roots, Cisco DNA. No, that doesn’t mean they are typing fancy buzzwords to try and jump the stock price, (looking at everyone adding blockchain to their company name), but it’s refocus on core products, Cisco Digital Network Architecture.

Breaking down complex Cisco products

At the core of its business model, you can draw a strong correlation between Cisco and Apple, as they want to control the customer experience from top to bottom, spanning both hardware and software. Cisco currently sells in the following hardware categories:

  • Routing switches
  • Network routing switches
  • Wireless infrastructure (think wireless routers and such, both home and commercial)
  • Network security software

Where things start to get interesting is the addition of the new Cisco DNA software. Touted as the “next generation” of networking software, it aims to streamline and automate the whole ecosystem of networking. Cisco DNA makes it easy to provision computers, gives IT departments one-dashboard management of the entire network, automation now comes from drag and drop rules, zero-touch device deployment (think new cell phones for employees), and uses machine learning to actively detect and learn about new security threats and block them.

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That’s a huge time savings for IT departments all over the world and in corporate America. Data security is now at the forefront of most consumers minds, and with data breach fines from regulators reaching into the $10’s of millions of dollars, this is seen as a worthwhile investment.

How Cisco grows the company

An interesting point of note is that Cisco is now going to be charging for the DNA platform on a monthly subscription. A slight departure from the normal business model, and is reminiscent of the change that Adobe ($ADBE) when it moved to subscription for Creative Cloud. This should add not only significant cash flow to the company, but help bolster it by increasing additional hardware to end consumers.

Where the money gets made for an investor

With peeks at the 10-K, there seems to be a refocusing of the company on the Cisco DNA product. If we believe in the growth of the company, this blue chip stock could see some impressive growth over the long term, which is great for value investors.

Doing a 10 YR Discounted Cash Flow EBITDA analysis, we can find the following bits of information:

  • DCF rate of 8%-9%, settling on 8.5% for our model
  • Terminal EBITDA multiple of 13.7x-15.7x, selling on 14.7x for our model
  • 2.4% compound annual growth rate (CAGR)
  • 5.8% unlevered cash flow by 10 year CAGR

This breakdown gives us a target price of $64.35, representing a 37% upside. Keep in mind, this upside is based on recent financial filings, and has a great chance of accelerating should Cisco get companies to jump on board to the subscription model.


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