Cisco Systems, Inc. (CSCO)

Cisco Systems manufactures and sells the physical equipment that routes data across networks — routers, switches, firewalls, and related hardware that form the backbone of enterprise information technology and the internet itself. From its founding in 1984 through the late 1990s, Cisco grew explosively as the internet scaled from academia into commerce. That growth story papered over some management missteps in the 2000s, and the company has since reinvented itself multiple times, shifting from hardware dominance to a portfolio that blends gear, software, and security services. Today Cisco is best understood as a company in a long transition, managing a declining core business while trying to grow faster in cloud and security, and working to justify a valuation built on the old story.

The founding: networking for the emerging internet

Cisco was born in 1984 when Leonard Bosack and Sandra Lerner, both computer scientists at Stanford, tried to send email to each other across different computer networks on campus. The university had networks that could not talk to each other. Bosack and Lerner built an early router, a device that could forward data from one network to another, and called it the Cisco (a nickname for San Francisco). The university eventually used their router; they formed a company around the idea.

In the mid-to-late 1980s, as universities and corporations began building local-area networks and connecting them together, routers became essential infrastructure. Cisco had an early-mover advantage and a solid product. The company went public in 1990 and rode the wave of the internet’s commercialization through the 1990s. The expansion of the World Wide Web, the rise of email as business-critical, and the explosion in remote access all drove demand for networking equipment. Cisco became the de facto standard router maker. Its share price soared. By the late 1990s, Cisco was one of the most valuable companies in the world.

The growth accelerator and the dot-com bubble

Much of Cisco’s explosive growth in the 1990s was genuine: the internet was scaling, and enterprise customers needed Cisco’s routers and switches to manage that growth. But some of it was fueled by excess. During the dot-com bubble, Cisco’s valuation reached almost unimaginable heights. The company was priced as if it would grow 50% per year forever. It was trading at dozens of times revenue, a multiple that implied near-perfect execution and no serious competition forever.

Cisco pursued an aggressive acquisition strategy in the late 1990s and early 2000s, buying dozens of smaller companies at inflated prices. The strategy was to build a one-stop-shop for enterprise networking. The company expanded into optical networking (buying Cerent for $7 billion in 1999), security, wireless, and software. Some of those acquisitions worked out; many did not.

The plateau and the lesson

When the dot-com bubble burst in 2000, Cisco’s revenue growth slowed sharply. The company had overbuilt its business for a demand surge that had peaked. There were massive inventory write-downs and layoffs. Cisco’s stock, which had traded at more than $80 per share (adjusting for splits) in early 2000, fell to $8 by 2002. It was a stunning collapse for a company that had been treated as a sure thing.

The experience taught a lesson that the company still lives with: hardware refresh cycles are lumpy and unpredictable. A customer buys networking gear, it works for 5–10 years, and then eventually it is replaced. There is no way to smooth that demand curve or to make it grow faster by force. Growth depends on expanding the addressable market (more businesses going digital, more data), not on making existing customers replace equipment faster.

The long, steady business (and its decline)

For the next 15 years or so, Cisco was a steady, profitable business. The company sold routers and switches to enterprises, telecom companies, and governments. It was a reliable cash generator and a fixture in IT budgets. The core networking business probably generated more revenue and profit for Cisco than any single business unit has ever generated for a technology company of comparable size.

But steady cash generation is not the same as growth. By the 2010s, networking hardware was becoming commoditized. Open-source alternatives emerged. Smaller, more nimble competitors undercut Cisco on price in some segments. And the overall market for networking hardware was maturing — it was still large and still profitable, but growing at single-digit rates, not double digits.

The pivot to cloud and software

In the mid-2010s, Cisco’s leadership began a strategic shift. The company wanted to move away from selling hardware boxes and toward software, cloud services, and subscriptions. This is the classic challenge for a hardware vendor: how do you reduce the importance of hardware without cannibalizing the business that funds everything else?

Cisco bought Meraki (a cloud-based network management company) for $1.3 billion in 2012. It invested in security software (buying companies like Sourcefire and Umbrella). It launched AppDynamics for application monitoring, Webex for video conferencing, and Duo Security for access control. The strategy was to layer software and subscription services on top of the hardware base, moving toward a more recurring, software-like revenue model.

This strategy made business sense. Software is higher-margin and more predictable than hardware. But it was also difficult to execute. Cisco was hiring thousands of people and building new products, all while the core hardware business was slowly declining. For a long time, Cisco could use the cash from the core business to fund these experiments. But as hardware revenue flattened and declined, the math became harder.

COVID-19, Webex, and recent turbulence

When COVID-19 forced companies and schools into remote work and online learning, Webex demand exploded. Cisco’s video-conferencing platform suddenly became mission-critical. Overnight, Webex was relevant and growing. It was the kind of tailwind that a struggling business desperately needs.

But Webex’s growth eventually slowed as the emergency demand subsided and as competitors (notably Zoom and Microsoft Teams) entrenched. Cisco made a massive restructuring in 2023, cutting thousands of jobs and consolidating its product portfolio. The company acknowledged that it had been chasing too many markets and needed to focus. The announcement of the restructuring triggered a sharp stock decline.

The current shape of the business

Today Cisco’s revenue comes from several sources: traditional networking hardware (routers, switches, and related gear), cybersecurity (firewalls, intrusion prevention, and related tools), software subscriptions (Webex, security software, management tools), and services. The mix has shifted: subscription and software revenue is now a larger share than it was a decade ago. But the core networking hardware business, which was once the engine of growth and profit, is still the largest single line of revenue.

The company is also pushing “intent-based networking,” which aims to automate network configuration and management using artificial intelligence. This is positioning Cisco for a future where networks are more self-optimizing and less labor-intensive. Whether this becomes a major growth driver or simply a competitive feature remains to be seen.

The investment case and the transition trap

Cisco’s business is profitable and generates significant free cash flow. The company returns capital to shareholders through buybacks and dividends. But the fundamental question that has hung over Cisco for nearly two decades is whether a hardware company can successfully become a software company. It is easy to say; it is much harder to do.

The company is competing with pure-software and pure-security players that have much higher growth rates, even if Cisco’s businesses are larger. It is fighting against open-source alternatives and disaggregated networking (where customers piece together solutions from multiple vendors instead of buying everything from one company). And it is managing a slow decline in its most profitable legacy business while trying to accelerate growth in new segments.

Cisco is unlikely to fail. It is too profitable, too entrenched in enterprise IT, and too well-funded. But it is also unlikely to ever again be a growth stock. The company is in the middle of a very long transition, and the results of that transition are still genuinely uncertain.

How to research Cisco as an investment

Cisco’s 10-K filing (SEC CIK 0000858877) lays out revenue by product category and by segment, showing the composition of the business and how fast (or slowly) each part is growing. Watch the subscription and software revenue growth rate — if that is decelerating, the pivot is stalling. Watch gross margins, since a shift from hardware to software should lift margins over time. And watch the stock-based compensation and free cash flow to see whether the company is returning capital to shareholders or burning it.

The quarterly earnings calls are where management provides color on competitive wins and losses, customer sentiment, and near-term demand. Also track the gross margin trend by product category; if hardware margins are compressing faster than software margins are expanding, that signals trouble with the transition strategy.