Every Monty Python fan has their own particular favorite bit, but certainly one of the best-known comes from "Monty Python and the Holy Grail" where John Young's character stubbornly proclaims to not be dead, despite the protestations and insistence of John Cleese's character. While this intro could apply to any number of once-great tech stocks, today's subject is Cisco (Nasdaq:CSCO). While Cisco has indeed made many missteps and missed some significant opportunities, this networking giant is most certainly not dead yet. (For more, see Earning Forecasts: A Primer.)

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More Share than Many People Think
Not unlike Microsoft (Nasdaq:MSFT) in operating systems and consumer and business software, much is made of the share that Cisco is going to "inevitably" lose. That seems to fly in the face of the fact that Cisco presently enjoys high-60%'s share in switching, and more than 50% share in routing (with a considerably higher share in enterprise).

Unlike Microsoft, which faces determined rivals like Apple (Nasdaq:AAPL) and Google (Nasdaq:GOOG), Cisco is the clear leader in its largest markets. Overall, Juniper Networks (NYSE:JNPR), Hewlett-Packard (NYSE:HPQ), Alcatel-Lucent (NYSE:ALU) and Brocade Communications (Nasdaq:BRCD) are far down the page when it comes to overall market share, even if they are sometimes relatively stronger in specific markets (like Alcatel in certain service provider categories).

Switching and routing are not growing like they once were, but that's far from saying they're no longer growth opportunities. More and more services are being pushed through networks (telephone, video, etc.) and that puts increasing demands on equipment sophistication. Moreover, Cisco is not so exposed to the service provider market where growth has been much more erratic.

The New New Thing - Cisco Needs to Start Getting It Right
Cisco management may get too much blame for not seeing the eventual slowdowns in its core markets. In fact, it looks like management did see it but addressed in the wrong ways. The acquisitions of set-top box maker Scientific Atlanta and home networking company Linksys were supposed to augment the company's growth and position them for new market opportunities. Both have largely been failures, and the decision of Apple to pursue some sort of TV device could make it even worse.

At the same time, Cisco has fallen behind in some significant areas. Juniper and Brocade are ahead of Cisco in data center fabric switching, and Big Data is clearly one of the important places to be today. Elsewhere, the company has seen rivals like F5 Networks (Nasdaq:FFIV), Riverbed Technology (Nasdaq:RVBD) and Aruba Networks (Nasdaq:ARUN) grab strategic positions in growth markets like application delivery controllers, WAN optimization, and wireless LAN, respectively.

The good news for Cisco is that the opportunity in the data center is very large and likely to last for years to come. The bad news is that Cisco is playing catch-up in many cases and also has to worry about rear-guard attacks from Huawei and ZTE who both seem perfectly willing to compete on price in the name of gaining share.

The Bottom Line
With the amount of cash that Cisco generates, the company can afford major investments in research and development and it is not as though the company's new product cupboard is bare (a new product for data center fabric dubbed "Jawbreaker" is on the way, for instance). Still, the expectation now is that Cisco is going to struggle to grow (a byproduct of being overweight to slower-growing markets) and face margins pressures. The Street is also worried about the prospect of further money-wasting deals.

The bright side of the story is that Cisco's stock trades with minimal expectations. Including the cash on the balance sheet, a projection of just 4% compound annual free cash flow growth suggests the stock should be worth close to $28. Strip out the cash entirely and today's valuation very nearly assumes that Cisco will never grow again.

Although the company needs to show that management "gets it" and really does understand where its true growth opportunities lie, today's valuation suggests that patient investors could yet find some rewards here. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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