Cisco Systems: Re-routing

Is developing software a superior business to building hardware? It is something to reflect on as John Chambers, the chief executive of Cisco Systems since 1995 and one of Silicon Valley's leading ambassadors, announced Monday he would move to the executive chairman role. Cisco was once the most valuable company in the world, measured by a market capitalisation that reached $550bn. It rode the internet build-out of the late 1990s that required its routers. Today it still has a healthy market capitalisation of $150bn, but its share price is around a third of where it peaked in early 2000.

It is unfair to compare Cisco's stock price today to its absurd level during the previous tech hysteria. And Cisco did come out much better than telecom equipment firms that truly flamed out, such as Nortel Networks and Global Crossing.

But comparing its stock price to Microsoft and Oracle, two other lumbering legends, its recovery looks weak. Those two software companies are 18 and 2 per cent off their dotcom peaks. Perhaps most troubling for Cisco is it shares remain slightly below its post dotcom, pre-financial crisis high.

Mr Chambers has relentlessly tried to remake Cisco as an all-encompassing tech vendor, the "number one IT company" as he calls it. That means diversifying into software. Cisco is chasing the latest software trends including cloud computing, security, big data and the ever-nebulous "internet of things" (connecting devices around the home and workplace).

Despite all the new initiatives, Cisco's annual revenue of about $48bn has struggled to maintain growth in recent years. But with cost cuts and some signs of progress its shares have doubled in the last three years. Cisco's role model just may be Apple, the device company whose record equity valuation of $750bn could be explained by its creation of a software system that binds all its gadgets.

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