These are the good days for Cisco Systems Inc. (NASDAQ:CSCO). Opening this morning at $46, CSCO stock is at its highest since those glory days of the dot-com boom, when Cisco was briefly the world’s most-valuable company, above $68 a share in early 2000.
After the company blew past its 2007 high of $32 a share last September, it has not looked back, even while funding a rising stream of dividends that are now up to 33 cents per share, and full supported by earnings. So far in 2018 it’s the best performing stock in the Dow Jones Industrial Average, up almost 19%.
Cisco is due to report earnings on May 16, with analysts expecting it to earn 65 cents per share, and hoping for 66 cents, on revenue of $12.33 billion.
Can it go higher?
Cisco is Like Apple
Cisco can indeed rise ahead of earnings, as our Bret Kenwell writes, thanks to a cash hoard of $74 billion, against debt of less than $30 billion. Take out the cash, and the company is worth about $180 billion, a little over four times its fiscal 2017 sales.
The company is thus in a good position to buy back CSCO stock, raise the dividend, or make the proverbial game-changing acquisition.
The problem is that such acquisitions aren’t on the horizon. Cisco has become heavily involved in computer security over the last few years. The best plays — like Palo Alto Networks Inc (NYSE:PANW), and Check Point Software Technologies Ltd. (NASDAQ:CHKP) would be too dilutive, trading at 10 times their annual revenue. Buying a rival like Juniper Networks, Inc. (NYSE:JNPR) would cost half as much as Palo Alto but would likely run into antitrust problems.
None of Cisco’s recent acquisitions have been game changing. They have been easily affordable for a company with a $200 billion market cap — AppDynamics and its application performance management software cost $3.7 billion, while Broadsoft and its cloud collaboration software was had at a price of $1.9 billion.
Most of today’s game-changing vulnerabilities are in hardware, but Cisco is increasingly more of a software than a hardware company.
Will CiscoSoft Emerge?
A wider future in software could be reflected in Cisco’s latest acquisition, the $270 million purchase of Accompany, which provides digital profiles on-the-fly off databases. The deal moves board member Amy Chang into a line role, running the company’s collaboration technology group, units like Broadsoft.
The cloud era has turned Cisco toward software, as software defined networking eats into its router and switching business. The idea is to own applications on top of software defined networking, much as Microsoft Corporation (NASDAQ:MSFT) built an applications business on top of Windows, or Oracle Corp. (NYSE:ORCL) on top of databases.
It’s the success of this strategy, so far, that has made CEO Chuck Robbins, 52, something of a star. The transition also provides more certainty on both revenue and earnings.
But the strategy does have risks. Cisco recently dumped its video software business, formerly known as NDS Group, back to its original owners for less than the $5 billion it originally paid in 2012.
Bottom Line on CSCO Stock
Cisco is not just one company anymore, selling hardware to phone companies. It’s a collection of networking software operations, selling through the cloud to enterprises.
That may be a more secure place for CSCO stock holder to be, but it doesn’t offer spectacular growth, because as one set of markets is growing ,another set may be dying. Cisco’s top line has shown no growth for the last three years, its balance sheet and cash flow showing equally sound stability.
Stability is good for a dividend investor. Cisco yields 2.9%. That’s why you buy the stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.