Company Profile
Founding of the company
Cisco (ticker: CSCO) was founded in 1984 by a pair of computer scientists from Stanford University, Leonard Bosack and Sandy Lerner. The two helped connect computers on the Stanford campus and pioneered a routing system that supported multiple protocols to connect computers located in different geographical locations.
The fisrt product
In March 1986, Cisco provided the world’s first routing product – Advanced Gateway Server (AGS) to Utah State University.
In 1994, Cisco launched the first intelligent Cisco Catalyst series of switches for client/server workgroups. The first batch of new products came from the acquisition of Crescendo.
IPO
When it went public in 1990, Cisco had a market value of US$224 million. By the end of the dot-com bubble in 2000, Cisco’s market value exceeded US$500 billion, making it the world’s largest listed company by market value at the time.
Switch Industry Overview
How big is the market?
It is estimated that there are approximately 7,999 data centers worldwide. About 30% of them are in the United States.
Leading vendors
The companies that dominate the data center switch field are as follows: Cisco, Arista, NEC, Huawei, Juniper Networks, Hewlett Packard Enterprise, Dell, Extreme Networks, D-Link, ZTE, etc.
Market share
Arista’s market share in the data center switch market has increased rapidly, from 3.5% in 2012 to 18.8% in the second quarter of 2019, according to the Crehan Research Data Center Switch Market Share Report.
Company’s business overview
Main products
Cisco’s main products include switches, routers, firewalls, servers, software, etc.
Business Scope
Cisco’s products and services focus on three market segments—enterprises, service providers, and small and medium-sized businesses.
Cisco provides IT products and services across five major technology areas: networking (including Ethernet, fiber, wireless and mobile), security, collaboration (including voice, video and data), data center and IoT.
Important acquisitions
- In 2007, Cisco acquired WebEx, a major provider of global commercial network video conferencing systems, for US$3.2 billion in cash.
- On July 23, 2013, Cisco Systems acquired network information security provider Sourcefire for US$2.7 billion.
- On February 14, 2016, Cisco Systems acquired cloud IoT service platform Jasper for US$1.4 billion.
- On January 25, 2017, Cisco Systems acquired AppDynamics, an American business software company, for US$3.7 billion.
- On August 3, 2018, Cisco Systems acquired Duo Security, a venture capital-backed cybersecurity company, for $2.35 billion in cash.
- On July 9, 2019, Cisco Systems acquired optical chip manufacturer Acacia Communications for US$2.84 billion in cash.
- On September 21, 2023, Cisco announced its acquisition of cybersecurity company Splunk for $28 billion, its largest acquisition to date.
Competitors
Top rivals
Cisco’s main competitors include Arista (ticker: ANET), IBM (ticker: IBM), Hewlett Packard Enterprise (ticker: HPE), which acquired Juniper, Broadcom (ticker: AVGO), Huawei, etc. Among them, Arista is particularly important.
Since the establishment of Arista, Cisco has continued to press hard on Arista step by step. It has launched a comprehensive attack on patents, laws, and marketing. The tactics are exactly the same as the intimidation tactics Cisco used against Huawei 20 or 30 years ago. But it turns out that after thirty years, Huawei and Cisco are no longer opponents of the same level. At present, it seems that Cisco’s various methods of attacking Arista are of no use at all.
For detail on Arista, please see my post of “How Arista, the nemesis of Cisco’s monopoly, makes money?“
Other rivals
In the Ethernet and switch market, there are also Taiwan’s Accton and Broadcom, two white-label companies that have been working in this field for a long time. Among them, Broadcom is especially a heavyweight manufacturer. Please see my post of “The reasons behind Broadcom share price consistantly outperformance“
Potential competitors
Not only are there concerns about competition between InfiniBand and more standard Ethernet technologies, but in April 2024, analysts downgraded Arista due to concerns that Nvidia would also start producing its own Ethernet switch.
Nvidia not only makes data center GPUs for artificial intelligence (AI), but another key to its success is InfiniBand, which it acquired when it merged with Mellanox in early 2020. In addition to InfiniBand networking technology that helps simplify the adoption of the latest and greatest AI hardware, Nvidia also acquired some Ethernet technology from Mellanox.
This is exactly why Nvidia’s recent shift in focus towards Ethernet has made the market a little nervous. The company’s Spectrum-X Ethernet platform hopes to build on InfiniBand’s early success and become a more direct competitor to Arista for its data center customers. Arista’s top customers include Microsoft, Meta, major financial institutions and other large enterprises.
However, Arista management pointed out in a conference call with analysts during the first quarter of 2024 financial report: We do not yet believe that Nvidia is a direct competitor in Ethernet. I think it’s 1% of their business. This is 100% our business. So we don’t have to worry about this overlap at all.
Financial performance
First quarter of 2024
Cisco’s first quarter 2024 report exceeded market expectations, but the stock price still fell sharply. Mainly because even with the help of the Splunk acquisition, revenue still fell 13% year over year, and profits fell by a similar amount.
Outlook
Cisco’s earnings can sometimes grow quickly, but on average, the company can grow slowly at best.
Main risks
Cisco stock does look cheap, but the company does face some real challenges. Cisco remains the dominant player in the switching and routing market, but competitors are making headway in some areas. Arista Networks in particular has proven to be a thorn in Cisco’s side. In the 10GbE and above portion of the data center switching market, Arista’s market share in dollar terms has nearly caught up with Cisco’s.
Capital market performance
Market valuation
Cisco expects adjusted earnings per share in the range of $3.69 to $3.71 for the fiscal year. That works out to a price-to-earnings ratio of about 13. Analyst consensus expects fiscal 2025 earnings to be slightly lower, so the stock is slightly more expensive on a forward P/E basis.
Dividend
Cisco’s dividend yield has remained above 3% for a long time, making it a company worth considering for investors who focus on dividends.
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