Tickers in this Article: CSCO, HPQ, JNPR, DELL
Although the S&P 500 has dropped nearly 7% from the high reached in late April 2011, many other stocks have done much worse as investors flee from riskier assets. This may open up opportunities for investors that have a longer investment horizon and a more optimistic view on the economic recovery. One of these stocks is Cisco (Nasdaq:CSCO), which is suffering not only from negative money flows as investors reduce equity exposure, but also from stock-specific issues that might prevent a full recovery if the market moves higher.

TUTORIAL: The Industry Handbook: The Internet Industry

Investor Disappointment
Cisco has dropped from $24 per share down to around $15 per share on the back of three consecutive quarters of disappointing news on growth. In November 2010, the company talked about the challenges it faced as orders slowed from state governments, service providers and European governments.

In February 2011, Cisco did it again as the company's revenue guidance fell short, leading to more selling by traders and investors. The carnage continued in May 2011 as the company's results and outlook for the third fiscal quarter failed to quell the investor rebellion over slowing growth. Cisco even announced a restructuring plan involving layoffs and the closing of noncore businesses. Although this plan was targeting a $1 billion cut in expenses, investors were not impressed. (For more on restructuring, see Cashing In On Corporate Restructuring.)

Secular Decline?
Many analysts and investors are suggesting that Cisco has entered a secular decline, as the company faces price competition from Hewlett-Packard (NYSE:HPQ), Juniper Networks (NYSE:JNPR) and other competitors. This may result in a permanently lower gross margin for the company.

In the quarter ending April 2000, which was arguably the peak of the technology bubble, Cisco reported a gross margin of 64%. In the nine months ending April 2011, Cisco reported a still-healthy product gross margin of 61%.

Dell Redux
Is it possible that Cisco is entering a growth phase experienced by another technology giant? Dell Computer (Nasdaq:DELL) was known for its rapid growth as it rode the PC cycle in the late 1990s and early 2000s, only to be pounded by the market as that growth slowed.

Earnings Growth
Cisco is expected to grow earnings by only 8%, to $1.73 per share in the fiscal year ending July 2012. This is decent growth that many companies would love to have, but that growth is clearly not acceptable relative to the company's history and the expectations of technology investors. (For related reading, see Great Expectations: Forecasting Sales Growth.)

Valuation
One counter-argument used by bullish investors is that Cisco is trading at a multiple of only 8.7 times forward P/E. This valuation makes the stock attractive when considered in the context of the company's $26.6 billion in net cash.

Cisco is either a value trap or a great value depending on an investor's view of the company's competitive position and future growth prospects. (For more on value traps, see Value Traps: Bargain Hunters Beware!)

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