Is Cisco Ready for a Breakout Year?

Cisco Systems (NASDAQ:CSCO) has been a solid Blue-Chip performer recently, gaining around 25 percent since the beginning of the year. A longtime market leader in routing and switching hardware, Cisco has recently expanded into the fast-growing field of software-defined networking. With a new focus on SDN, is Cisco positioned for new heights in 2013? Let’s use our CHEAT SHEET investing framework to determine whether Cisco is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

CEO John Chambers recently declared that Cisco is now an “IT company.” Shareholders should be excited about this change because most of the company’s growth in third quarter came from non-traditional business lines: its data center, wireless, and service provider video units. Cisco is well positioned to capitalize on the rapidly growing SDN industry with its secretive Insieme spin-off. It is important that they achieve first-mover advantage in the SDN market as rival, Juniper (NYSE:JNPR), is also gunning for market share.

Cisco recently acquired data analytics firm Composite Software for $180 million in a bid to sell more subscription-based software. The transition from hardware, namely routers and switches, to software should actually help Cisco’s already high margins of 61 percent. Routers and switches, however, still make up two-thirds of the company’s revenue. Cisco has experienced strong hardware sales in the past two years as companies have increased their IT spending budgets to pre-financial crisis levels.