Cisco Stock Value Drops as the Company Fails to Handle Product Transition

Handle Product Transition

The networking giant Cisco has been facing product transition-related problems for last few months. With each passing day, the problem is becoming more apparent and causing Cisco stock to drop and its rivals to gain opportunity.

In June 2013, Cisco (NYSE: CSCO) introduced the CRS-X router which holds 10 times the capacity of the company’s original CRS router. But the company has failed to manage this product transition effectively and due to that, CRS-X router underperformed.

The same year, Cisco acquired Insieme Networks to compete VMware’s server virtualization solution which got a kickstart after VMware (NYSE: VMW) acquired Nicira. VMware’s entry into the software-defined networking has been smooth, courtesy to Nicira’s flagship technology. But for Cisco, the path wasn’t rosy.

In the first quarter of 2013, Cisco’s EPS was $0.02 short of what Wall Street expected. The first quarter of 2014 has also been seeing Cisco stock to perform poorly as year over year fall of total sales was 7.4% or $11.2 billion.

When it comes to annual growth, 2013 was perhaps the worst year. From Q1 2013 to Q4 2013, Cisco’s share saw a drop of 5% in the service provider router market while its rivals Alcatel and Juniper (NYSE: JNPR)held 18% and 17% respectively of the $12.7 billion market.

Cisco’s stock value in the market today dropped to $21.45 which is down almost 20% since last year’s August. It was 0.28% down from the previous day’s closing of $21.51. Observing this, analyst Ben Reitzes from Barclays reduced the price target from $25 to $23. Although the stock is currently 0.56% up, $23 seems a justified price margin.

Reitzes said, “Given that well over half of Cisco’s product revenue comes from routing and switching, we believe execution on large product transitions in both of these segments is critical to a revenue and margin recovery ”

The chief reasons shown by analysts to explain the bleeding of Cisco stock are uneven demand, secular headwind and absence of major catalysts.

Barclays concludes its analysis of Cisco with, “Material upside to estimates does not seem likely at this point and it is also unlikely for the shares to re-rate higher until it becomes clear that the company can successfully execute on its major product transitions and fully participate in the cloud and software-defined networking”

The networking market is tough and there’s no indication it will help Cisco pave its way up unless the company comes up with a solution.