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Cisco Earnings Were Great — But Beware Thangrycat

InvestorPlace logo InvestorPlace 5/16/2019 Will Ashworth
a close up of a tall building: Thanks to 5G and Wi-Fi 6, Cisco Stock Remains A Buy Going Into Earnings© Source: Shutterstock Thanks to 5G and Wi-Fi 6, Cisco Stock Remains A Buy Going Into Earnings

Pat yourself on the back if you own Cisco (NASDAQ:CSCO). The San Jose-based enterprise networking company reported Q3 2019 results May 15 after the markets closed. The numbers were decent and the guidance even better, sending Cisco stock higher in early Thursday morning trading.   

a sign on the side of a building: Thanks to 5G and Wi-Fi 6, Cisco Stock Remains A Buy Going Into Earnings© Provided by InvestorPlace Media LLC Thanks to 5G and Wi-Fi 6, Cisco Stock Remains A Buy Going Into Earnings

On the bottom line, Cisco announced earnings per share of 78 cents, a penny higher than analyst estimates. On the top line, revenue was $12.96 billion, $70 million ahead of the consensus. Year over year, sales were up 6%, net income rose 8%, and earnings per share increased 18% in the third quarter.

More importantly than solid earnings is the company’s guidance for the fourth quarter.

Cisco expects revenue of 4.5%-6.5% in Q4 2019, with earnings per share of $0.80-$0.82. The analyst consensus is for 3.5% sales growth and earnings per share of $0.81.

The only negative I could see in its press release was a 4% decline in revenue in Asia. But even there, it managed to increase gross margins year over year by 160 basis points to 60.7%, so business is good at Cisco.

A New Security Threat

Pouring over the online information available about “Thrangrycat,” the latest security vulnerability to hit Cisco routers, switches and firewalls, my eyes started to glaze over at all the technical jargon.

I don’t know how people who aren’t tech savvy can invest in stocks like Cisco because the level of understanding required for some of this stuff is top drawer. If ever there were a sector where an ETF makes sense for DIY investors, technology would be it.

I dare you to go through Red Balloon Security’s press release about Thangrycat and explain to a close friend or family member in a single sentence (140 characters) what the problem is and why it could affect Cisco stock.

If you can’t, you have no business owning its stock.

Instead, buy the Technology Select Sector SPDR Fund (NYSEARCA:XLK), which holds Cisco stock — it’s the fourth-largest holding at a weighting of 4.54% — and call it a day. You can thank me later.

I’m slightly facetious. We all get courageous from time to time and wade into areas where our expertise is less than stellar. I’m doing it right now.

What’s Thangrycat?

I’ll let Red Balloon founder Dr. Ang Cui’s words explain why this latest security vulnerability could be bad news for Cisco and Cisco stock.

“This is a significant security weakness which potentially exposes a large number of corporate, government and even military networks to remote attacks. We’re talking about tens of millions of devices potentially affected by this vulnerability, many of them located inside of sensitive networks,” Cui stated in its May 13 press release.

“Since the Thrangrycat flaws reside within the hardware design, it is unlikely that any software security patch will fully resolve the fundamental security vulnerability. This is the real danger, and it will be difficult for companies, financial institutions and government agencies to properly address this problem.”

I’m sure if pushed, Cui could come up with a 140-character answer as to what the problem is and why it’s a concern, but I sure couldn’t and nor could most of InvestorPlace’s readers.

The bottom line is that many of Cisco’s customers might not be aware of the issue. If it goes undetected for long enough, a customer’s sensitive data could be fully compromised, putting both it and Cisco at risk.

For this reason, Cisco’s Product Security Incident Response Team (PSIRT) has been working diligently with Red Balloon to address the vulnerability. On May 13, Cisco released a security advisory regarding Thangrycat. Some of the software patches are already availabe but other updates to fix some of these issues won’t be ready for several months.

I don’t know about you, but that wouldn’t give me a warm, fuzzy feeling if I were in charge of cybersecurity for a large enterprise.

The Bottom Line on CSCO Stock

Before every tech person emails me saying I’m making a mountain out of a molehill, I realize that part of Cisco’s business is putting out fires like Thangrycat. I’m sure there are plenty of people in San Jose and elsewhere that are working to minimize the damage it does.

That said, consider real forest fires and the human resources that’s dispatched to put them out. These are highly trained personnel parachuted into the affected areas, yet nature often holds the upper hand.

Thangrycat likely won’t affect the Cisco stock price, but it’s something you ought to be aware of if you’re considering buying after its positive outlook in the fourth quarter.  

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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