During the past year, the earnings reports from Cisco (CSCO) have definitely picked up some mojo. And investors have taken note, sending Cisco stock up 15% in the past 12 months.
The bigger question, though, is what we should expect when the company reports first-quarter results on Thursday, after the market closes.
Well, let’s first look at the Street estimates. Revenues are expected to come in at $12.65 billion, up 3.3% from the same period a year ago. Cisco earnings are forecast to reach 56 cents per share, which would be a 3.7% increase year-over-year.
These small improvements may not seem too exciting, but they’re a heck of a lot better than what we’re seeing from most old tech operators. Just look at IBM (IBM) and Qualcomm (QCOM), which have been suffering from material drops in revenues. By comparison, Cisco stock looks like a gazelle. Keep in mind that IBM is down 15% over the past year, and QCOM is off about 22%.
Cisco Stock: The Good News
Now it certainly helps that CSCO has been getting traction with its core networking technology, such as the release of its next-generation Nexus 9000 product line. There is also lots of promise with the cybersecurity business, which grew at a 12% pace in the prior quarter, reaching $1.7 billion. CSCO has been aggressive with acquisitions in the sector, making deals for companies like Sourcefire, Lancope and OpenDNS.
On a longer-term basis, Cisco stock could potentially benefit from the megatrend of the Internet of Things (IoT), which involves the connections of the Internet to consumer products as well as industrial equipment. In order for IoT to reach a wider scale, it needs sophisticated networking equipment, which puts CSCO in nice position to benefit.
What’s more, the company has been focused on being disciplined with costs. To this end, it is taking steps to reduce the headcount by about 8% or 6,000 employees. There have also been moves to unload various business units, as seen with its TV set-top box business.
Cisco stock also sports a fairly reasonable valuation. After all, the forward price-to-earnings ratio is 11. But other large tech operators have much higher multiples, such as Oracle (ORCL) at 14 and Microsoft (MSFT) at 17.
CSCO also sports a decent dividend yield, at 3%.
Risk Factors for CSCO
Yet Cisco stock faces no shortage of risks. Let’s face it, the competitive environment is brutal. Part of the competition comes from low-cost operators in China, like Huawei.
There’s also substantial pressure from Internet powerhouses like Facebook (FB), Google (GOOG, GOOGL) and Amazon (AMZN), who have been developing their own core networking technologies to handle the massive scale of their operations. Unfortunately for CSCO, this means losing potential business.
But there is also the threat that these Internet companies will start selling their own technologies. Amazon did exactly that with its Amazon Web Services, which has turned out to become a big moneymaker.
China is also likely to be another issue for Cisco stock. Not long ago, CSCO was the dominant player in the market. But that Chinese government has gotten more forceful in promoting domestic operators and has also been concerned with issues of national security.
How bad was the damage? Well, according to Sanford Bernstein, the market share from the beginning of 2014 has been cut in half.
However, CSCO is working hard to get back into the game. For example, the company plans to invest $10 billion in China over the next few years and is looking to forge partnerships with domestic companies. But such efforts will probably take time — and, in the end, may not really get things back into gear.
Bottom Line for Cisco Earnings
Given that the growth rate of CSCO is already muted, the impact from China and the increasing competitive environment could easily weigh on earnings. In fact, the adverse impact from China has already taken a toll on QCOM, as seen with its latest awful earnings report. Interestingly enough, on the cybersecurity side, there was also an adverse impact on FireEye (FEYE).
In other words, for now it’s probably best to take a wait-and-see approach on Cisco stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
