For Wall Street, 2015 was the year that few things — if any — went right, and a prime example is the never-boring world of technology stocks.
After producing strong gains in 2013 and 2014, the benchmark exchange-traded fund Technology SPDR ETF (XLK) added an uncharacteristically meek 4% in the markets last year. Even companies like the much-vaunted Apple Inc. (AAPL) suddenly saw sentiment turn sour.
As many in the tech sector struggle to find their footing, Cisco Systems, Inc. (CSCO) appears to be a step ahead of the competition.
Year-to-date, CSCO stock is down 3%, which is actually a positive given the bleak circumstances surrounding the global markets. By comparison, the blue-chip index S&P 500 is in the red by 6% YTD.
But the real news is the dramatic turnaround that has occurred over the past week. Since Feb. 10, CSCO stock jumped nearly 18%, blowing past its 50-day trailing price average in short order.
Best of all for CSCO’s long-suffering shareholders, momentum is consistently strong throughout the short rally.
But Can It Last for CSCO Stock?
The worry, of course, is that this is merely a technical ploy. Pronounced volatility in the markets can often trigger institutional buy orders. But if there’s nothing fundamentally sound supporting the ensuing optimism, such technically driven trading can rapidly fall apart.
This doesn’t appear to be the case with CSCO stock. Undoubtedly, trading dynamics have contributed to the recent rally, but there’s some meat to this story.
Perhaps the most obvious sign that Cisco is a long-distance bull is its second-quarter fiscal year 2016 earnings report. Net income trends exceeded analysts’ expectations, while its total revenue of $11.9 billion met consensus estimates. But most impressive for those paying attention was CSCO’s continued inroads into Asian markets.
At a time when several of its competitors were balking at proposed China deals — due to the heavy 20% YTD loss in the Dow Jones Shanghai Index — CSCO actually saw increased business in the Asian powerhouse. This surprising demand reflected broad optimism for Cisco products.
Sales within the region of Asia-Pacific, Japan and China grew by 10% year-over-year. Such improvements aren’t just a boon for CSCO stockholders — they may indicate that international economies are stronger than implied by global stock markets.
Admittedly, there is a flipside to the CSCO argument. Networking switching equipment — Cisco’s bread-and-butter business — took a hit in Q2, with sales falling 4% year-over-year. According to the tech company’s chief executive officer, Chuck Robbins, several of Cisco’s corporate clients delayed previously planned upgrades in order to gauge the broad turmoil in the financial markets.
There’s two ways to look at it. If the markets do come back, Cisco would presumably regain sales in its core business. If it doesn’t, the outcome for CSCO stock is a bit uncertain.
Cisco’s Financials Remain Strong
What isn’t ambiguous, however, is the tech giant’s financial standing. From a profitability perspective, both operating and net margins average over 20%, which is among the best in the global telecommunication equipment industry.
Against trailing and forecasted earnings growth, CSCO stock is attractively priced. Most notably, capital expenditures represent a small take from cash flow from operations. This has contributed to an impressively strong and consistent free cash flow year after year.
Certainly, there are changes in the tech industry that will challenge Cisco, with the greatest pressure coming from cloud computing services. Despite these threats to its long-term strategy, though, CSCO is pressing on with its vision. Leveraging its position as a leader in telecom and networking, the company has introduced products that are more intuitive, with software that is compatible with a diverse range of systems.
All in all, CSCO stockholders should find that Cisco’s strengths outweigh its weaknesses. Shares immediately moved higher after the positive Q2 earnings result.
However, unlike a flash in the pan, money continued to pour into CSCO.
The company’s ability to drive sales in Asian markets was a major eye-opener. In addition, its financial strength gives CSCO the ability to ride out waves that would sink lesser tech stocks.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
