Recommending we add ADBE to 2.5% and trim CSCO by 100bps. The proceeds from CSCO, along with the proceeds from Fairfax, will help fund the ADBE position. The rest will come from IVV.
Investment thesis on ADBE:
- Market leader with technology, switching cost and network effect driven moat.
- Benefiting from secular growth driven by digital transformation, device proliferation, rising content creation and evolving content mediums including voice, augmented reality and virtual reality.
- Recurring revenue (~90%) and diverse industry end markets provide resilience in a downturn.
- Capital light model with high FCF margins and ROIC. Secular growth plus modest operating leverage combined with share buybacks leads to strong long term value creation.
Reasons for trimming CSCO:
· No change in log-term thesis. The rationale for trimming is that due to the changing environment, catalysts look to be longer term in nature than originally anticipated.
· Long-term, Cisco stands to benefit from a product refresh cycle and evolving network demands that ultimately are driven by increasing data traffic. With rising data traffic, technologies are changing (cloud, 5G, IoT, WiFi 6, AI) and networks are becoming more complex – Cisco’s products help companies solve for that by helping them simplify, automate, and secure their infrastructure.
· The difficult thing for Cisco right now is that these technologies are still early stages and still a looming benefit. Before the outbreak of the coronavirus, they were facing some headwinds in IT spending which I think in the medium term may increase. It’s a chain reaction of technology changes/upgrades that leads to spending on CSCO’s products, which I think companies can put off for a period of time, but not indefinitely.
· When we added to CSCO last fall, CSCO was unique in terms of its discount to intrinsic value…the opportunity set is changing.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$CSCO.US
[tag CSCO]
[category equity research]
$ADBE.US
[tag ADBE]
[category equity research]