Stock Review: Cisco

Stock Review: Cisco

Cisco (CSCO) is a leading protagonist of the modern technology era. Their story starts on Stanford University’s campus in the 1980s and the company name comes from the city of San Fran-cisco, the epicenter of internet, mobile, cloud, and now AI computing.

Cisco is first and foremost a hardware company that sells networking and switching equipment to large enterprises and data centers. From their own website, this is how Cisco describes a network switch:

“A switch is a hardware component in network infrastructure that performs the switching process. The switch connects network devices, such as computers and servers, to one another. 

A switch enables multiple devices to share a network while preventing each device’s traffic from interfering with other devices’ traffic. The switch acts as a traffic cop at a busy intersection. When a data packet arrives at one of its ports, the switch determines which direction the packet is headed. It then forwards the packet through the correct port for its destination.”

In the 1990s Cisco helped build the plumbing behind the internet’s infrastructure. Revenues grew ~50% year-over-year as their technology helped enterprises, both large and small, more seamlessly and securely connect a disparate patchwork of computers and local servers to the global internet.

At their peak valuation in the dot-com bubble, the stock was trading at a price/sales multiple of ~33x (expensive!). When the market capitalization reached ~$555 billion in the spring of 2000, they briefly surpassed GE and Microsoft to become the largest company by market capitalization in the world.

From March 2000 to October 2002, Cisco’s stock experienced a -89% drawdown from its previous all-time high of $80. If you had bought the stock in 2000 and held, you would have only just made it back to even on your investment (in terms of price) in 2025.

The business itself has chugged right along that entire time. For the last 30 years, the company has grown its revenues by roughly 30 times, from $2 billion in 1995 to just over $60 billion in the last 12 months.

Despite being a poster child of the dot-com boom and bust, Cisco has been a quiet compounder trading at a more reasonable valuation in recent years. We’ve held the stock in our model portfolio[1] thanks to the undemanding valuation and other qualities such as:  

• Cisco started paying a dividend in 2011 that has grown at a compound annual rate of ~19% since initiation;
• Operating margins have consistently been above 20% over the last 10 years;
• The company has a manageable amount of debt on its balance sheet (last year’s free cash flow would cover about 40% of their total debt burden);
• Cisco invests in both research and development for organic growth ($9.5 billion in R&D spending last year) while also acquiring businesses to expand their customer reach and product portfolio.

After a period of mature growth in the 2010s when topline revenues compounded around 2-3% per year, Cisco is expected to see its sales reaccelerate over the next few years as resources pour into new data centers that utilize lots of networking technology.

From their most recent earnings presentation and conference call, CEO Chuck Robbins had this to say about the current demand for their product portfolio:

“Networking product orders continued to accelerate, growing more than 50% in Q3, driven by triple-digit growth in service provider routing and compute and double-digit growth in data center switching, campus switching, wireless, enterprise routing, and Industrial IoT products. This marks the seventh consecutive quarter of double-digit growth for our networking portfolio overall. AI infrastructure orders taken from hyperscalers totaled $1.9 billion in Q3, compared to $600 million in the year prior, with strong growth across our Silicon One systems and market-leading Acacia Optics. The year-to-date total of $5.3 billion in orders taken from hyperscalers already exceeds our prior expectations of $5 billion for FY 2026, with a full quarter remaining.”

Since we are value-conscious investors, we are aware that when the topline growth of the business is improving, the valuation multiple usually has correspondingly increased.

This ever-present tension between fundamentals and price generates healthy debates in our investment committee about the merits of trimming back or adding to any given stock in our models.

The stock market is rich with history. The storylines and characters evolve over time, but things like technological change and greed and fear are constant features of the market.

No doubt Cisco has played a leading role in stock market history over the last three decades, and it will be interesting to see how the arc of their business narrative unfolds from here.

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[1] The Model Portfolio is not a real cash portfolio. It represents the core direction of our portfolio management strategies. Individual client portfolios are managed in accordance with the clients’ specific objectives and constraints. Historical information is available upon request.