Cisco to Become the Next Apple: Undervalued by 200%

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NEW YORK (TheStreet) -- One of the biggest challenges for investors has always come when trying to assess the investment worthiness of stocks that are already trading at higher multiples. Not only does this get complicated when one does not already have a standard for what represents "value," but it gets a bit more problematic when the investor is not yet certain of his/her objectives -- whether growth, income, or for that matter, value.

In these situations, a market-beating portfolio often comes down to finding the right balance of all three. As enamored as I have become with tech stocks, I will conceded that it is rare to find such a balance, particularly when the added bonus of dividend is thrown into the mix.

For that matter, recently the prevailing question has been, is it possible to find a technology stock that trades at a multiple that would be considered "reasonable," pay out enough of its earnings, offer excellent growth opportunities and to top it off, offer yields that would interest dividend-growth investors?

This situation is akin to finding a needle in a haystack. But if one stock merits such consideration, it would be networking giant Cisco CSCO , not only does it fit the criteria of a perfect stock, but it is positioning itself to trade at $60 within three years -- a return of 200%.

How's That Going to Happen?

"The great one," Wayne Gretzky, once summarized his success by suggesting that "a good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." It seems Gretzky understood the very important investment premise of forward-looking and anticipating trends. And this is a quality that Cisco is starting to demonstrate today more than any other company in the stock market.

A perfect example of this was when it recently announced its intent to acquire NDS Group, a provider of content streaming and security software that will help expand its next-generation video services. But one of the more interesting components is that NDS also specializes in software that allows TV content to be delivered to a variety of devices.

>>Investors Ignoring Cisco . . . but Not for Long

Interestingly, this announcement arrived after an extensive study in which Cisco projected that global mobile data traffic is poised to explode in the next four years. In anticipation of mobile network traffic demands over the next four years, the company's study suggests that by 2016, monthly global mobile data traffic will surpass 10 exabytes, while over 100 million smart phone users will belong to the "gigabyte club" (over 1 GB per month).

Cisco sees the number of mobile-connected devices will exceed the world's population by the end of this year, while the average mobile connection speed will surpass 1 Mbps in 2014. These are pretty remarkable statistics when one considers the challenges presented today from the likes of Verizon VZ and AT&T T in terms of data restrictions.

But the more remarkable revelation is the idea that not only will mobile devices exceed 50% of all mobile data traffic, but Cisco projects that by the end of this year, the number of mobile-connected devices will exceed the number of people on earth while mobile network connection speeds will increase 9-fold by 2016.

So clearly, evidence suggests that Cisco gets it. But remarkably, Wall Street does not -- at least not to the extent where investors understand that Cisco will likely grow commensurate to this explosion in demand for bandwidth, some of which will be sparked by its acquisition of NDS.

Unlike its rivals Hewlett-Packard HPQ and Dell DELL , Cisco understands the future of data mobility. In fact, I will argue that it understands it appreciably better than both Apple AAPL and Google GOOG .

The fact of the matter is, although Apple is growing by leaps and bounds while successfully mitigating concerns of saturation by its recent Chinese expansion, all of this only supports Cisco's recent study of increase demand as it projected that by 2016, China will exceed 10% of the global mobile data traffic.

On that note, as speculation continues to mount around Apple's iTV or iPanel, it will become more critical for the size of content (presumably) stored on the cloud. It will require a considerable amount of capacity to travel from iPad to iPhone to iTV and back -- without interruption.

So in essence, it seems that while the market currently places the value on the growing sales of these devices, the real future value will come from the needs of increased data and bandwidth upon which these devices will function. So as much as Apple is valued as a stock -- and deservedly so, it is clear that the market does not yet see an explosion in growth that Cisco will soon experience.

Even more noteworthy is the fact that not only are more corporations adopting the concept of BYOD in favor of the stringent and traditionally rigid enterprise guidelines, but as the chart above illustrates, by 2016, one-quarter of all mobile users will have at least two devices, of which almost 10% will have three or more connected to the global network. This certainly gives new meaning to the prevailing concerns of "net neutrality." It will also redefine mobile-device saturation.

So that means in a short four years, while Apple will likely have already peaked in terms of growth, Cisco would have just gotten started on an "Apple-like growth" to the extent where it reaches $60. This is reminiscent of the good old days of the tech bubble -- except this time, the valuation will be justified.

Bottom Line

The bottom line is, Cisco does not get enough credit on Wall Street for being a bit smarter than everyone else. As the market is now overly consumed with buzzwords such as "virtualization," "the cloud," "anytime/anywhere computing," "big data," etc., investors continue to discount one of the major players in Cisco, which has already prepared itself to service the needs of this increased level of traffic; essentially, it has skated to where the puck is going, just as Apple did five years ago.

On that note, although the cars being manufactured by Apple are selling exceptionally well, Cisco, by its recent investments, will soon own the roads, many of which will require strategically placed toll booths for access to wider lanes. Today, while Cisco trades at a paltry forward P/E of 10 -- unfitting for a tech company of its caliber, both growth and value investors should really consider this as an opportunity to make a play for a company that will triple its current valuation by reaching $60 in a few years.

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