4 Opportunities Cisco Pessimists Need to Know About

Shares of Cisco (NASDAQ: CSCO) fell 4% on Aug. 17 after the networking-hardware giant reported mixed fourth-quarter numbers and soft guidance for the current quarter. Cisco's revenue fell 4% year-over-year to $12.13 billion, which narrowly beat expectations but marked its seventh-straight quarter of year-over-year declines.

Cisco's switching and routing revenue -- 44% of its top line -- both fell 9% annually. Those declines were partly offset by its 5% and 3% sales growth in its wireless and security businesses, respectively. Unfortunately, the security unit's single-digit growth marked a disappointing slowdown from its double-digit growth in prior quarters. Its earnings fell 3%, to $0.61 per share, which merely matched analyst expectations.

That anemic growth won't end anytime soon. For the first quarter, Cisco expects its revenue to dip 1% to 3% annually and its earnings to stay nearly flat, at $0.59 to $0.61 per share -- which merely matches analyst estimates. Wall Street expects Cisco's revenue and earnings to respectively rise 0.5% and 2.5% for the full year.

Therefore, it's easy to be pessimistic about Cisco and believe that the stock's nearly flat growth over the past year will persist for the foreseeable future. However, investors should recognize four potential catalysts for the stock.

1. Bringing its cash back home

Cisco's cash and equivalents rose 7% annually, to $70.5 billion at the end of fiscal 2017, but just $3 billion of that total is in the U.S. Cisco, like many multinational tech companies, keeps most of its cash overseas to avoid being hit by a 35% corporate tax.

However, the Trump Administration previously proposed replacing that tax rate with a one-time 10% tax on repatriated cash. House Republicans proposed an even lower rate of 8.75% on foreign earnings held as cash and a 3.5% tax on all other foreign earnings. If either of those changes occur, Cisco can bring its cash home for domestic acquisitions, stock buybacks, or dividend hikes.

2. Countering Arista Networks and "white box" solutions

A frequently cited threat to Cisco is the rise of generic "white-box" networking hardware that runs on open-source cloud-based software. In the past, enterprise customers purchased Cisco's products in bundles, assuming that its branded hardware and software worked better together. However, more customers are now buying cheaper white-box hardware that instead uses cloud-based software to do the heavy lifting.

Cisco's biggest rival in this market is Arista Networks (NYSE: ANET), which sells cheaper multilayer switches that are designed for these SDN (software-defined networking) purposes. Arista claims that the combination of its switches and open-source software will eventually replace all routers with cheaper software-based solutions -- which is a terrifying prospect for companies like Cisco.

In response, Cisco is suing Arista over patent issues, which is slowing the adoption of its SDN-optimized products across the U.S. That tactic probably won't work forever, but it might buy Cisco enough time to sell its own SDN solutions. Selling cheaper hardware would dent Cisco's margins, but it would also widen its moat against Arista -- and it could make up the difference by introducing other bundled services.

3. Acquiring other cybersecurity and wireless companies

With a free cash flow of $12.9 billion over the past 12 months, Cisco can beef up its smaller cybersecurity and wireless businesses with new acquisitions. About a dozen acquisitions since 2000 comprised the backbone of Cisco's security business, and its purchase of Meraki bolstered its presence in the cloud-based wireless-networking market.

Cisco's strategy is to buy those companies, integrate their services into its own networking hardware and software, then sell them at cost-competitive bundles to push rivals out of the market. Smaller companies have found it tough to counter that strategy -- that's why Meraki's rival Aruba Networks was eventually acquired by Hewlett-Packard Enterprise (NYSE: HPE).

Therefore, Cisco can keep buying smaller companies to grow its higher-growth security and wireless businesses -- which could eventually offset the weaker sales of its routers and switches.

4. A big dividend hike

Cisco currently pays a forward dividend yield of 3.6%, which is much higher than the S&P 500's average yield of 2%. But Cisco spent just 57% of its earnings and 43% of its free cash flow on those payments over the past 12 months.

If Cisco repatriates some of its overseas cash, it would have even more room for dividend hikes, or a special dividend. I'm not saying Cisco will significantly increase its payout, but doing so could get investors interested again.

The key takeaways

I personally own Cisco as a low-risk income play, so I don't expect its price to surge anytime soon. But I don't think investors should be too pessimistic about Cisco's prospects. It still has plenty of cash for big acquisitions and dividend payments, and it can expand significantly if it repatriates its overseas cash.

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Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.