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Morningstar | CSCO Updated Forecasts and Estimates from 06 Aug 2018

On Aug. 2, narrow-moat Cisco announced its intention to acquire Duo Security for $2.4 billion in cash and assumed equity awards. The acquisition of the privately held software-as-a-service firm is expected to close during the first quarter of Cisco's fiscal 2019, and we expect no major hurdles for the deal. After increasing our forecasts for Cisco's security segment revenue and anticipated fiscal 2019 acquisition expenditures, we are maintaining our fair value estimate of $41 per share. According to PitchBook, Duo Security's latest valuation was approximately $1.2 billion as of October 2017 and the company generated $100 million of revenue in 2017.

Duo Security's expertise lies in unified access, multifactor authentication, and application data analytics. The company allows enterprises to check that a user is authorized and analyzes the security of the device, including its applications, to ensure that only correct users with safe devices gain access to the network. Duo Security is not installed on devices but still provides data on users and devices utilizing a company's applications. Enterprises can find value in ensuring that only authenticated users are on a network, confirming the security status of devices is current, and gleaning insight from associated security analytics.

We believe this acquisition will strengthen Cisco's overall portfolio and is in line with the company's plan to provide more software and services in cloud-based environments. Cisco's intent-based networking and existing cloud-based security strategy is bolstered by gaining the ability to allow enterprises to establish and monitor end users and application-level security. As more devices access networks, enterprises are further exposed to security concerns through weak passwords and out-of-date devices or applications. In a cloud-based environment, security could benefit by moving closer to users and their devices as the first line of defense.

This acquisition broadens Cisco's security suite and enables additional selling opportunities. In our view, Cisco can combine the analytics under its wider cloud security platform to allow enterprises a deeper understanding of network activity. We believe Cisco sees the end-user analytics and cloud network edge as differentiators against other software-defined networking and security providers. This acquisition comes on the heels of Cisco completing the purchase of July Systems, which specializes in end-user locational services. Cisco may make the value proposition that enterprises can now use customer data analytics to increase sales while offering Duo Security as insurance that all users and devices are trusted.