Cisco Systems (CSCO) invests in new technologies for its data communications business by funding hundreds of smaller innovators and buying the most successful technologies that emerge, limiting the amount of risk inherent from the technology R&D process, says Ronald L. Altman, SVP and Senior Portfolio Manager at Anchor Capital Advisors LLC.
“Somebody comes into John Chambers’ office and says, ‘I have a great idea, I think I can build the business that’s going to be half a billion dollars or billion dollars,’ and he says, ‘How much money do you need and let’s see the business plan.’ If Cisco likes it, they put him in a separate company, they fund it, and they’ve got a hundred of these. If the company succeeds, they’d buy it. So they take a limited risk, and it’s a great venture capital pool that they can use to augment the products that they develop internally,” Altman said.
Altman says CSCO trades below the average value of a S&P 500 company, and he adds that Cisco is more of a software company than a hardware company, a distinction visible in the company’s gross margins.
“You can’t get 60%-plus gross margins in the hardware business. What you’re really looking at in Cisco is millions of lines of code buried in application-specific microprocessors inside their box. As long as the demand for data continues to grow and it grows at a very high rate, Cisco is a great play. Demand keeps growing and the distribution of that data keeps increasing. Cisco still has a very positive future,” Altman said.
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