Talking Numbers

This laggard could soon play catch-up

This laggard could soon play catch-up

Cisco is throwing $1 billion at clouds.

The tech giant known for the hardware that powers a huge chunk of the Internet's infrastructure (for example, it has nearly two-thirds of the Ethernet switch market), is now going after cloud computing.

In a statement Monday, Cisco announced that it will spend over $1 billion building out its cloud business over the next two years. For Cisco, this is a game of catch-up in $15 billion business that is expected to be double by the end of next year. As it now stands, cloud computing is dominated by Amazon, which makes more money in cloud computing than Microsoft, IBM, Google, and Salesforce combined.

(Read: Cisco joins cloud computing race with $1 billion plan: WSJ)

Cisco's foray into the cloud isn't the only reason to have shares of Cisco according to portfolio Chad Morganlander of Stifel's Washington Crossing Advisors. His firm bought shares of Cisco at a price of $19 and has a $25 per share price target. Stifel also makes a market in the stock.

According to Morganlander, Cisco is attractive because of the stock's price-to-cash flow (about 9 times), its holding of $9 in cash per share on average over the past twelve months, its dividend yield of 3.5%, and its earnings yield, which is expected to be $1.99 for the year ending July 2014.

"This thing is dirt cheap," says Morganlander. "You want to put it in your portfolio and forget about it."

Morganlander acknowledges that the market believes the stock will have a tough time over the next decade. Shares of Cisco are up just under 4% over the past twelve months and have underperformed the benchmark S&P 500 index's 20% rally during that time period. That hasn't deterred Morganlander's outlook.

"With this tremendous amount of free cash flow generation, it seems there's a disconnect," says Morganlander of Cisco's relative performance. "We would be buyers of this stock and we would hold it for a long time."

"The business model is viable," says Morganlander, "I think there are consistent earnings that will be coming in, and, more importantly, consistent cash flow…. It's extremely undervalued."

(Read: )

However, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, sees the potential for Cisco's stock to head down from here.

"For a stock which has for all intents and purposes largely become a utility for its stability and big yield," says Ross, "investors are still caught off guard."

Ross sees a well-defined short-term head and shoulders pattern with a neckline at the $20 price. "I think we get a test of it," says Ross of that level.

As well, the stock's long-term price chart shows that $20 is an important price for the stock. It's very close to where its technically significant 200-week moving average is.

"Look for a test of $20," says Ross. "If the broader market got a little sloppier – we're already seeing a little bit of a sell-off here in the NASDAQ which I think could accelerate – you could break through that $20 level. Below there, you're going to get your technical selling and you might just get a better chance to buy it lower."

To see the full discussion on Cisco with Morganlander on the fundamentals and Ross on the technicals, watch the video above.

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