Technology company Cisco Systems, Inc. (NASDAQ:CSCO) has been down in the dumps after its most recent earnings report showed that sales in the second quarter were expected to be down 2% to 4%. This news spooked investors and sent Cisco stock down nearly 5%.
While CSCO stock certainly has its share of headwinds to worry about in the coming year, it could make for a good long-term bet.
Transition Time for Cisco Stock
One of the reasons Cisco stock is struggling is that the company is in the midst of a transition period and is therefore experiencing some growing pains. CSCO is moving away from its traditional hardware product lines and toward other parts of its business that will remain relevant in the future. The firm is focusing on subscription-based services, security and data centers.
If you look at Cisco’s results in those areas, the company looks much more promising. The firm saw deferred product revenue for its subscription-based products rise by 48% to nearly $4 billion.
The firm’s routing and security segments also turned in promising figures, suggesting that once the company completes its transition, growth will continue.
CSCO Shareholders Will Be Rewarded
Another reason to add Cisco to your portfolio is the potential income that the stock brings to the table. Not only will investors benefit from long-term growth as its business develops, but CSCO stock has a respectable 3.4% dividend yield that is likely to increase further.
Cisco holds more than $60 billion overseas, making it one of the biggest beneficiaries of President-elect Donald Trump’s promise to rework the corporate tax regime and make it easier for companies to repatriate their funds. Trump has said that the corporate tax issues are at the top of his list of priorities and that he will address them during his first 100 days in office.
While Cisco hasn’t made any definite remarks about what the firm will do with the money once it is brought back, some part of it will likely make its way back to shareholders in one way or another.
Worries Are Overdone
The market’s panic following CSCO’s earnings release has made Cisco stock a much cheaper buy. Of course, investors have reason to question the firm’s stability in light of the weaker-than-expected second-quarter guidance, but those fears are overdone. Not only is the company in a period of transition, but the firm’s business as a whole has proven to be relatively stable.
Cisco CEO Chuck Robins said that shareholders “have too much focus on individual quarters, especially when you look at a service provider, which is dominated by incredibly large accounts.” He believes that “you have to look at it over time, and not just quarter to quarter.” And he’s absolutely right. Cisco may not have a stellar second quarter, but the firm’s improvement in key transition areas is a signal that business isn’t bad.
Cisco stock isn’t without its challenges — the company will struggle if macroeconomic conditions deteriorate and customers are less willing to spend on new systems.
Another big concern is that the firm’s shift toward services puts it in direct competition with Amazon.com, Inc.’s (NASDAQ:AMZN) Amazon Web Services.
The Bottom Line
Despite those headwinds, Cisco stock appears ready for a rally and makes for a good buy for long-term investors. Those who are able to wait out a few rough patches will be rewarded when the firm makes its full transition, and the company’s dividend payments and the promise of repatriation make the wait that much more bearable.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.