3 Reasons to Remain Bullish on Cisco Systems, Inc. Stock

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CSCO - 3 Reasons to Remain Bullish on Cisco Systems, Inc. Stock

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Since the summer, Cisco Systems, Inc. (NASDAQ:CSCO) has pulled off an impressive rally. True, the recent volatility in the markets has taken some of the air out of the shares. Yet the gain is still about 33%.

So what now? Is there still an opportunity with Cisco stock? Well, I think so. The latest earnings report certainly points to a pickup in momentum, as the company posted a nice beat on earnings and revenues. The guidance was also encouraging. After a long string of declines on the top line, the company is now forecasting 1% to 3% increases for fiscal 2018.

Now it’s true that CSCO stock has some potential issues. Just look at the competitive environment. In the core networking business, the company must fight tough rivals like Juniper Networks, Inc. (NYSE:JNPR), Hewlett Packard Enterprise Co (NYSE:HPE), Arista Networks Inc (NYSE:ANET) and Huawei.

Yet Cisco has some major advantages, which should bolster its share price. So let’s take a look.

CSCO Stock Advantage #1 – Secular Trends

There are many technologies that are likely to benefit from long-term growth, such as cloud computing, AI (artificial intelligence) and the Internet-of-Things. All these also require sophisticated infrastructure and networking systems.

No doubt, this is very good news for Cisco stock. According to Synergy Research Group, the company has roughly 51% of the worldwide switching and router market.

Cisco has some major competitive strengths, like a trusted brand, a full suite of products, and massive scale. The company has also been investing aggressively to innovate its offerings. Consider the Catalyst 9000 switching platform, which has snagged more than 1,100 customers in just three months.

This is what CEO Charles Robbins had to say about it on the latest earnings call:

“We expect continued momentum throughout fiscal 2018, and we’re pleased that the vast majority of Catalyst 9000 customers are buying our most advanced software subscription offer.”

Cisco has also seen traction with its next-generation data-center switching platform for multi-cloud environments. It includes a variety of cutting-edge technologies like network automation and intent-based networking.

CSCO Stock Advantage #2 – The Transition to Software

Over the past few years, CSCO has been restructuring its business, which has involved significant layoffs and cost cutting. But the company has also been focusing more on the software business.

All in all, this is a smart move. The company has a tremendous distribution footprint and can also derive synergies with its networking platform. But software also has higher margins and better growth prospects. Another advantage is that the revenues are recurring.

For the most part, CSCO has been investing in categories like security and cloud computing. Part of this has been through internal development.

But of course, CSCO has also been making transformative acquisitions. Some of the notable deals include AppDynamics (which is a provider of analytics for networks and the data center), Perspica (a leader in machine learning and AI) and BroadSoft (a cloud-based operator for contact centers).

CSCO Stock Advantage #3 – Valuation and Dividend

Even with the run-up in Cisco stock, the valuation is still reasonable. Note that the forward price-to-earnings multiple is 15.7X.

The dividend yield on CSCO stock is also attractive, at about 2.8%. By comparison, Microsoft Corporation (NASDAQ:MSFT) is at 1.83%, and Apple Inc. (NASDAQ:AAPL) sports a yield of 1.57%.

And finally, CSCO continues to be a cash machine. During the latest quarter, cash flow from operating activities rose by 13% to $3.1 billion (the total amount in the bank is $71.6 billion). In other words, there will continue to be lots of firepower for M&A, share buybacks and dividend increases.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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/2018/02/3-reasons-to-remain-bullish-on-cisco-stock/.

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