Why Does Cisco Systems, Inc. (NASDAQ:CSCO) Appear So Cheap?

September 29, 2017, 09:04 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Cisco Systems, Inc. (NASDAQ:CSCO) is currently in the midst of a multi-year transformation strategy as it seeks to transition from being a hardware manufacturer and vendor to providing software services. However, the company has reported declining revenues for the past seven quarters, which is one of the major reasons why the company appears so cheap.

However, despite the declining revenues and earnings per share, Cisco has a lot going for it in the services sector, such that it would not be surprising if the company’s fortunes change for the better.

Many of the hardware products that defined Cisco in the past, such as switching and routing equipment as well as data center equipment are losing ground to competitors from companies such as Juniper Networks, Inc. (NYSE:JNPR) and Hewlett Packard Enterprise Co (NYSE:HPE).

Cisco has curved a niche for itself as a market leader in cloud security even as more companies choose to operate cloud-based systems instead of the traditional on-site hardware systems. The company has accrued significant deferred revenue by charging its software customers upfront for services not yet rendered.

The company has reported significant growth in deferred revenues, which have compensated for the steady decline in sales figures. The company has significant free cash flow from its operations as evidenced by the $70 billion FCF reported in Q2 2017.

Cisco has collaborated with Microsoft Corporation (NASDAQ:MSFT) by allowing Microsoft to run its own operating system on Cisco’s data centers. This move has allowed Microsoft to run its Azure infrastructure on Cisco’s hardware, which is good for the company’s future growth.

The two companies have also collaborated on a project that allows users to host their own IoT or Internet of Things applications through Microsoft’s Azure platform, while utilizing Cisco’s fog computing solutions. The two collaboration projects are set to benefit Cisco greatly even as the Azure platform keeps growing exponentially having reported 97% annualized growth in Q2 2017.

The cloud security market is also expanding a fast pace and given that Cisco is positioned as a market leader in this industry, the company stands to reap significantly even as more companies invest in cloud security applications. The question remains whether Cisco is a good long-term investment at its current cheap price.

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