The biggest manufacturer of networking hardware in the world, Cisco Systems (CSCO 0.39%), has shown to be a durable investment even when the IT industry was hammered by macroeconomic headwinds including inflation, increasing interest rates, and others. Over the last 12 months, the company's stock price increased by 5%, and over the last six months, it remained unchanged.
Due to its large cash position, attractive 2.8% future yield, steady profit margins, and cheap multiple, Cisco has performed well. Because of these advantages, it was a solid defensive investment in a choppy market.
In the first half of Cisco's fiscal 2022, which began last August, its adjusted gross margin decreased by 140 basis points year over year to 65%. It anticipates that number to drop to between 63.5% and 64.5% in the third quarter.
For its hardware division, it mostly blames supply-chain issues and rising company expenses for the margin compression. These challenges will continue throughout the second half of fiscal 2022, according to Cisco CFO Scott Herren, who made the prediction during the company's most recent conference call in mid-February.
But the Russian invasion of Ukraine, which began in late February and is already putting strain on the semiconductor supply chain, might make things worse and make them last well into the fiscal year 2023.
According to IDC, Cisco's worldwide ethernet switching market share decreased from 57% in 2016 to 45.3% in 2021. Additionally, its market share of service providers and business routers decreased from 42.2% to 34.6%.
Additionally, inexpensive off-the-shelf switches and routers known as white box models compete with Cisco. Large telecom organizations and operators of data centers are drawn to this method of saving money.
With so much competition, Cisco may be forced to aggressively build its software companies in order to maintain its hardware business' long-term success.
Cisco revamped its product line into five new business areas in September of last year: end-to-end security, internet for the future, hybrid work, secure and agile networks, and enhanced application experiences. This year, its weakest link has been the hybrid work unit, which will be renamed the collaboration business beginning in the current quarter.