Back on Aug. 14, Cisco Systems Inc. (NasdaqGS: CSCO) said it would lay off about 4,000 workers – roughly 5% of its staff.
That wasn’t the only thing that rattled Wall Street…
CEO John Chambers also slightly lowered earnings guidance for this fiscal year. That sent Cisco into a tailspin: The shares dropped 7% that day and are off 9.7% since Chambers announced the cutbacks.
Once again, however, both Wall Street and the mainstream media missed the real story.
You see, Chambers isn’t just cutting workers to cut costs and cover a shortfall due to slowing revenue. He’s also trying to reallocate the company’s resources to capitalize on a new business opportunity that he sees for Cisco.
And here’s the best part.
This emerging business opportunity could be worth $14 trillion – meaning it’s almost as big as the entire U.S. economy.
That makes this high-tech bonanza one of the biggest profit opportunities we’ll see in our lifetime…
And we’re going to get you in on the ground floor.
When all the World is a Network
It’s no exaggeration to say Cisco helped build the Internet. The company sells routers, switches, servers, optical components and wireless controllers that have turned the Web into a powerful, simple-to-use and highly practical tool.
So, if any one knows the critical role the Web plays in the world’s global economy it’s Chambers.
That’s why he’s so enthusiastic about this new business opportunity, a tech field known as the “Internet of Things,” or “Internet of Everything.”
Simply stated, the IoT, as it is often called, means that nearly every single object in the world will be connected to a vast computer network.
And I mean every single object.
We’re talking about a world in which your home’s refrigerator, thermostat, windows, hot water heater – and even your carpets – are all connected and can “communicate” with you and each other via Web access points, both wired and mobile.
And that’s just for starters. On your morning commute, your car or SUV – as well as all the vehicles around you – will automatically log into a network. Your car will also talk to the other vehicles around it to help create instant traffic updates and to avoid collisions. To do all this, and more, your vehicle will send and receive data through the Internet of Everything.
The potential is staggering, for even now we’re just beginning to imagine all that could be possible. You’ll wear computerized glasses, clothing and “smart” devices like wristwatches that can monitor your health. They will send vital data and emergency alerts to your smartphone and automatically copy your doctor.
Your prescription bottle will send you an alert when the medicine inside is running low. The pills themselves will contain devices that monitor your vitals from inside your body.
Thus, the Internet of Everything isn’t just one high-tech platform. It’s an all-encompassing “system of systems” – made possible by special sensors, chips and seamless, wireless connections that enable devices of all sorts to talk with each other.
Follow the Money
From an investment standpoint, this means we’ll be looking at hundreds – even thousands – of profit opportunities across a plethora of sectors.
And it also means that the IoT will add some real muscle to each of the major profit trends we’ve been telling you about for months.
The Internet of Everything will push Big Data, medical devices, wearable computers, Cloud Computing, software as a service (SaaS), cybersecurity, broadband components, optical networking, semiconductors and much, much more.
That’s why Chambers puts a $14 trillion price tag on the Internet of Everything. And he says that number is just his estimate for profits. Actual sales generated by IoT will be several times higher.
Honestly, in the history of the human race, we’ve never seen any piece of technology this all-consuming. As Chambers views it, the IoT will supercharge productivity and vastly increase the profitability of firms one wouldn’t normally think of as being tech-centric.
If you want an intriguing example, just look at agribusiness.
While you wouldn’t normally look at farms, food suppliers or fertilizer makers as being “high tech,” the truth is that by harnessing the power of the IoT, agricultural operations will greatly increase their yields while reducing runoff of pesticides that might have damaged streams in the past.
Imagine how much more productive a farm will be if every cow, chicken, pig – as well as every corn, soybean, wheat and milo field can provide critical feedback by autonomously connecting to the IoT.
And here’s the real key: We’re not talking about some futurist vision, or some science-fiction fantasy that might happen … a few years from now.
This is a global technological gold rush that’s revving up even as you read this.
And while – as we said – there are several fast moving high profit plays to consider, there’s one core stock you need to buy right now as a long-term holding.
I’m talking about Cisco.
You see, while Chambers is publicly laying off several thousand middle managers to boost profits, he’s also creating the infrastructure he needs to become the King of the Internet of Everything.
The King of the “New” Internet
Chambers is serious about grabbing – and keeping – the IoT crown.
In late June, Chambers launched a new Cisco Internet of Everything (IoE) business unit. Right out of the gate he gave this fledgling group a budget of $200 million for research & development and product marketing.
Chambers is jump-starting the division by placing 500 workers there. That equates to about 12.5% of the layoffs he recently announced.
In other words, Chambers isn’t just slashing middle managers simply to lower overhead. He is retooling Cisco to get a leg up in the burgeoning IoT sector.
He’s also putting a highly respected executive in charge of the new unit. That exec – Robert Soderbery – is a senior vice president who formerly headed Cisco’s enterprise networking group, meaning he was in charge of network technology sold to large organizations, some of Cisco’s most important clients.
Soderbery will be joined by Wim Elfrink, chief globalization officer and executive vice president of emerging solutions. Elfrink previously ran Cisco’s India operations, so he knows a growth market when he sees one.
Chambers wouldn’t install these two high-profile execs in such a slot – and give them 500 employees and $200 million to spend – if he didn’t believe that IoT technology will add significantly to the parent company’s bottom line.
Here’s another reason to like Cisco: Despite the layoffs and the skidding stock price we mentioned earlier, this is actually a financially healthy corporation. For fiscal 2013, Cisco’s earnings came in at $10 billion – a 24% increase from the previous fiscal year. The fourth quarter alone – when profits zoomed 18% – was the 10th straight quarter with record earnings.
Those numbers tell a story. For Chambers, you see, it’s all about the bottom line.
And he’s repeatedly demonstrated that he’ll make whatever changes are needed to keep Cisco on a growth track.
From Leader to Laggard … to Leader Again
After spending time at International Business Machines and Wang Laboratories, Chambers joined Cisco in 1991 as a senior vice president. Since becoming CEO in January 1995, the company has grown from $70 million in annual revenue to $49 billion.
And Chambers knows how to “bring it” to the bottom line.
Cisco has profit margins of 20.5% and a return on stockholder’s equity (ROE) of 18%. From that $49 billion in revenue, Cisco generates $7.4 billion in free cash flow (FCF).
So the Chambers-run Cisco is a well-run firm and has the numbers to prove it. But the stock remains a laggard.
No doubt, it’s done well over the past year, up roughly 24% even after the recent selloff. But over the past five years, it has remained basically stuck in neutral, with a loss of 0.17% not counting dividends. (The current payout represents a 2.8% dividend yield.)
This is a very different story from the Internet’s early days in the 1990s when Cisco was the darling of tech investors. For the five years ending in late March 2000 when the dot-com bust began, Cisco gained an astounding 3,550%.
So we know Cisco has shown explosive gains in the past. And I believe that Cisco’s realigned focus on IoT technology will awaken this tech giant’s snoozing share price.
The question, of course, is should you buy Cisco today?
You could, of course, so long as you understand that the shares are going to run in place for a time.
This isn’t because Cisco is a “has been” or a lousy business, as Wall Street might have you believe. The problem, at the moment, is that Wall Street just doesn’t yet understand what’s really happening here.
And so soon after the big investors claim to be “disappointed” by Cisco’s latest news, I don’t yet see any catalysts or other developments that might change their bearish collective mindset.
Here at Strategic Tech Investor, we don’t follow Wall Street’s lead.
But we do want Wall Street to follow ours.
Here’s what I mean by that statement:
Once we’ve made a recommendation, and you’ve had the opportunity to make your investment, we’re happy to see the analysts up on Wall Street start pounding the table on the very same stock. Upgrades like that attract the liquidity needed to drive that stock much higher in price.
So the investment pros serve a useful purpose for us.
And the trouble is that – as much as I like the company’s fundamentals and its aggressive push into IoT – I think those “catalysts” are still some time away.
This soon after a “bad news” announcement by the tech heavyweight, the upgrade cycle is still somewhere in the future, meaning the stock is going to be idle for a time.
But let me be clear: Even though I’m not formally recommending it today, I do believe that Cisco will become a great stock to own. Otherwise, I wouldn’t have spent so much time analyzing the firm’s new focus and its potential.
So be assured that I’m going to watch the company closely, and will let you know when my signals tell me that it’s time for you to make your move.
By giving you this “heads-up” now, you’ll be able to move fast and strike quickly when I report back to you. Besides, I wanted you to know about the Internet of Everything – and I wanted you to know about it now … before it starts to show up in the mainstream media.
As we look for that chance to pull the trigger on Cisco, we’ll continue to make good use of our time here. We’ll continue to monitor the other big trends we’ve been following together – trends like Big Data, the Mobile Wave and Cloud Computing. And now that we’ve added the Internet of Everything to that list, you can be sure that a whole host of new profit plays will reveal themselves to us.
In fact, as I mentioned earlier, there are several fast moving plays that, thanks to the Internet of Everything, can give you a chance to bag massive profits from the biggest opportunity in tech-sector history … from right under the nose of a snoozing Wall Street.
And there’s one huge opportunity I’ve been tracking in particular. In fact, since releasing my research on this play, the buzz has been astounding.
See you later this week.
[Editor’s Note: I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you.]