CSCO Stock: Is This Bad News for Cisco Systems, Inc.?

CSCO StockCould This Hurt CSCO Stock?

Cisco Systems, Inc. (NASDAQ:CSCO) stock is one of the strongest dividend plays in the technology industry. But a shifting industry trend suggests that it might get elbowed out if it doesn’t take the right steps in time.

A new report by International Data Corporation (IDC) is out and it doesn’t spell good news for Cisco stock. IDC has tracked the worldwide wireless LAN (WLAN) market to gauge the market share of some of the industry’s heavyweights.

Bear in mind that the wireless LAN market serves both consumer and enterprise markets. Companies like Cisco make most of their money from selling to big enterprises.

IDC’s research reveals that the consumer WLAN market has been in a decline through 2015. It’s understandable. The consumer market has seen a massive shift from PCs toward smartphones and tablets, which means less WLAN usage and more LTE usage.

On the other hand, IDC found that the enterprise WLAN market is still growing. In fact, the last quarter of 2015 was the best quarter of the year, with 5.9% year-over-year growth.

Now, this should have served as good news for Cisco, but only if Cisco’s WLAN market share was also growing. Sadly, it’s quite the opposite.

During the fourth quarter of 2015, Cisco’s WLAN revenue fell by 0.7% year-over-year. For the full year, revenue grew a modest two percent, but Cisco’s WLAN market share slid by 0.8% to 47%. (Source: “Worldwide WLAN Market Sees Best Growth of Lukewarm Year in the Fourth Quarter of 2015, According to IDC,” International Data Corporation, March 7, 2016.)

Recall that Cisco was a heavyweight tech stock of the Dotcom bubble. The company’s glaring success was a result of its software-defined networking (SDN) business segment. Even today, Cisco remains a world leader in SDN; its Ethernet switches are ubiquitously found connecting businesses across the world. Currently, Cisco’s SDN market share sits at 60%.

But that side of business started facing a decline when wireless connectivity replaced wired connectivity. Seeing the shifting industry dynamics, Cisco ventured into wireless connectivity (WLAN). However, IDC’s report bears bad news, as this business also seems to be declining.

The Bottom Line on CSCO Stock

Cisco is still a market leader in the worldwide WLAN market, but the fact that it is losing ground to smaller companies should serve as a serious warning to management. The company must look for other growth avenues.

Cisco’s recent partnership with Ericsson is one such avenue that is keeping hopes alive in CSCO stock. The company is moving towards the next-generation 5G and cloud computing technologies to create a Cisco “Network of Future” for the “Internet of Things” (IoT) industry. This new venture will likely prove to be a game-changer for the company.

In a nutshell, the concerns on Cisco’s slowing growth are genuine, but new growth avenues bear positive signals for CSCO stock. It’s not all gloom and doom for CSCO stock just yet.