Should I Buy Cisco Systems, Inc. (CSCO) Stock? 3 Pros, 3 Cons

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Cisco Systems, Inc. (NASDAQ:CSCO) has been a flop as a long-term investment. For the past decade, the return has been an awful 11%. But lately, the CSCO stock price has been getting some mojo. In fact, the return for this year is the same as for the past 10 years!

Should I Buy Cisco Systems, Inc. (CSCO) Stock? 3 Pros, 3 Cons

Note that the company’s CEO, Chuck Robbins, came on board in the summer of 2015 and has not wasted much time in making some big changes, such as with divesting non-core assets and investing more aggressively in growth markets like cloud computing and mobile. All in all, there are signs that these moves are gaining traction.

The competitive environment remains intense, however, and Cisco stock is feeling the pressure on the company’s main networking business. It’s not exactly easy to make the transition from hardware to software.

That means Cisco stock could be a value or a risk right now. To see, here’s a look at the pros and cons:

Cisco Stock Pros

Transformation: A key part of the growth strategy has been aggressive buying. It helps that the company has a long history of dealmaking. In other words, the company knows how to spot opportunities as well as integrate diverse cultures. There are also the critical advantages of Cisco’s global customer base, strong sales organization and trusted brand, especially when dealing with mission-critical technologies.

Yet this does not imply that the core networking business will somehow not be an important driver. If anything, the long-term prospects still look bright. According to Cisco’s research, the amount of mobile traffic is forecasted to surge by eight times from 2015 to 2020, representing a 53% compound annual growth rate. Some of the factors include mega-trends like streaming video, artificial intelligence, virtual reality and the Internet of Things.

Although, Cisco has been adapting to the swift changes in the market. To this end, the company is focusing more on software-based approaches and also subscription business models.

Strong Financials: CSCO continues to show discipline with its costs. During the summer, the company announced a 7% reduction in the workforce, translating into about 5,500 jobs. So yes, CSCO has continued to be a nice cash generator. For the latest quarter, operating cash flows came to $2.7 billion. In all, there is $71 billion in the bank. Something about this: $61 billion of that amount is in foreign accounts. That is, if Donald Trump passes legislation for lower taxes to repatriate capital — which seems like a pretty good bet — this will certainly be good news for holders of Cisco stock. The company will be able to use the resources for acquisitions, share buybacks and higher dividend payouts.

Valuation: Cisco stock looks like a good value. Consider that the forward price-earnings ratio is only about 12. Oh, and when subtracting out the cash, the multiple is a mere 6. By comparison, the forward P/E ratio for Microsoft Corporation (NASDAQ:MSFT) is 19 and Oracle Corporation (NYSE:ORCL) sports a multiple of 14 times earnings. Finally, CSCO has a decent dividend yield of 3.4%.

Cisco Stock Cons

Competition: Cisco must fight tough rivals in various markets. In the security space alone, there are standout operators like Palo Alto Networks Inc (NYSE:PANW) and Fortinet Inc (NASDAQ:FTNT). But perhaps the biggest competitive threat is to the core networking business. There are the long-time U.S. companies, such as Juniper Networks, Inc. (NYSE:JNPR) and Hewlett Packard Enterprise Co (NYSE:HPE), as well as next-gen firms like Arista Networks Inc (NYSE:ANET). At the same time, CSCO must fight against Huawei and other low-cost Chinese firms.

Yet there is another important factor: Cisco’s potential customers becoming competitors! To lower costs and improve performance, mega tech companies like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) have been building their own networking technologies.

Lumpiness of Revenues: Cisco sells to many large enterprise customers across the world. While this means that purchase orders are generally large and have long terms, there is always the risk of deals falling through or being delayed. Actually, if there are even minor snags, the impact on revenues can be significant. Interestingly enough, this happened during the latest quarter. The company gave a tepid outlook, with a forecast of revenues expected to fall by 2% to 4% in the current quarter. CSCO indicated that, yes, large network service provider customers have been pulling back on orders.

Growth: For a company at the scale of CSCO, it is natural for the top line to be fairly moderate. The problem is that — for some time — the growth path has been meager. As noted above, a key factor is that the core networking business is under pressure from the competition. During the latest quarter, the revenues from switching hardware fell 7% and there was a 6% drop in the router segment. But even in the more promising categories there are troublesome issues. In the latest quarter, the cloud-based collaboration business suffered a 3% decline in revenues and even the wireless gear segment was off by 5%.

Then again, CSCO management may be having difficulties in managing the complexities of diverse businesses. In other words, it may make sense for the company to think about focusing on a smaller number of operations.

Bottom Line on Cisco Stock

Again, Cisco faces some tough challenges. But it is important to keep in mind that turnarounds take time. As Robbins noted in the Q1 report: “You have to look at it over time, and not just quarter to quarter.”

Besides, Cisco is betting on the right markets, such as cloud computing and mobile. In fact, there are already indications that the security segment could be a key driver. In the latest quarter, revenues jumped by 11%. Then again, CSCO has been smart to build security features into its networking systems.

Finally, the valuation on Cisco stock is attractive and so is the dividend — and cash flows should remain substantial.

So for investors looking for a stable play in the tech sector, the pros outweigh the cons.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/cisco-systems-inc-csco-stock-price-pros-cons/.

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