Invest in the Software of Social Distancing
Social distancing is pushing thousands of enterprise employees out of office towers and into makeshift home offices. It’s a big trend that may last several quarters as the battle to contain the COVID-19 pandemic goes on.
Cisco Systems (CSCO) is the original networking business. Its telecommunications equipment connects devices in every part of the enterprise. And its security systems keep everything safe.
I generally preferred nimbler companies to Cisco in the past. I was willing to trade established relationships for revenue growth and innovation because the market was looking for what comes next.
Now, however, we are in a different era.
Against the current backdrop of unparalleled uncertainty, chief technology officers are likely to go with the legacy solutions they know and understand well.
Cisco is the quintessential legacy business. It makes dependable hardware that connects smartphones, computers, servers and Internet of Things devices in the field. And its scalable suite of software tools is easy to set up and easier to use.
For the first time since 2009, the San Jose, Calif. pioneer is in the right place at the right time, ready to flex without worry of pesky disruptors nipping at its heels.
Even before the coronavirus, companies were eager to shove their workers out of the office. Half of all information technology officers have made the move, according to a Bureau of Labor Statistics release last September. The transition for non-techies accelerated with cloud computing and client software like Slack (WORK), Microsoft (MSFT) Teams and now Zoom Video (ZM), the popular teleconferencing application I’ve spoken about recently.
COVID-19 may mean everyone must work remote, accelerating this trend. This will change the landscape of American businesses. And it’ll change the prospects of companies who create the software and hardware that make telecommuting possible.
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That means Cisco. Its Webex Teams software allows employees to securely attend meetings and share screens and whiteboards, all while being connected by voice and video.
The stock is down to $37.04 from a high of $56 last June. Year-to-date, shares have declined 22.6%. And they currently trade at historically cheap levels at 11x forward earnings and 3.4x sales.
And there is a real opportunity for shares to bounce back to the $43.50 level. That’s a potential gain of 13% with limited downside risk.
Investors should look to this short-term downside as an opportunity.
Jon D. Markman