Cisco Stock Is Back in Fashion, but Watch for a Global Downturn

Advertisement

Cisco stock - Cisco Stock Is Back in Fashion, but Watch for a Global Downturn

Source: Prayitno via Flickr (Modified)

Cisco Systems (NASDAQ:CSCO) reported its earnings for the quarter ending Oct. 28, and for once the stock wasn’t promptly taken out and shot by analysts. Cisco stock had a beat on both net income, 75 cents per share fully diluted, on revenue of $13.1 billion was considered good, and guidance for continuing growth sent traders into raptures, the stock rising 5.5% on Nov. 15.

It was a pretty good first quarter for Cisco stock.

The mood among analysts remained jubilant after the company’s earnings call, where CEO Chuck Robbins saw little impact from tariffs and said its networking hardware unit would benefit from falling memory prices.

While the average NASDAQ stock is now down 3.6% for the year, shares in Cisco are up over 20%, thanks to its emphasis on software sold as a service, and continued strength in computer networking.

Why Buy Cisco Stock Now?

Cisco shares had been lagging the market for nearly two decades before their recent break-out. The company, which was briefly the most valuable in the market at the height of the dot-com bubble, became a slow-growth dividend stock until legendary CEO John Chambers retired in 2015 and handed the reins to his number-two, Robbins.

Robbins set a new course, emphasizing software subscriptions rather than networking hardware, which was itself being slowly turned into software. He bought cloud software companies like Jasper Technologies and Viptela, as well as security companies like Cloudlock and, most recently,  Duo Security, for which he paid $2.35 billion in August. 

At the same time, Robbins has kept a firm rein on costs. Nine months after paying $13 million to lure Maria Martinez from Salesforce.Com (NASDAQ:CRM), for instance, the company laid off over 200 people  in her “Customer Experience” organization, which competes with Salesforce offerings. Total lay-offs came to 460. 

Is Cisco Cheap?

Cisco took charges at the end of 2017 to get full benefit of the tax cut, a January loss of $8.75 billion that skewed the full year’s results. Assuming it meets guidance, however, earnings during calendar 2018 could top $13 billion, meaning current buyers are paying less than 16 times earnings for the shares.

Add the company’s current dividend, 33 cents per share, and a yield of 2.8% alongside a rising stock price doesn’t look bad either.

The switch to subscription-based revenue has also reduced the seasonality that used to infect Cisco’s earnings, where businesses rushed to spend their budgets at the end of each calendar year.

Revenue has been growing steadily throughout 2018, and the company’s guidance for the quarter ending this January indicates that should continue.

This means that as the market turns from focusing on growth to value, Cisco suddenly becomes an obvious choice, with stable management, subscription revenue and a positive outlook in a computer security niche that analysts understand.

Robbins also struck an optimistic tone at the company’s partner summit, where it hosts 4,000 re-sellers. He said that all the things that were supposed to kill Cisco did not, that the company is now on the “right side” of the cloud transition, and that it is turning networks into platforms for growth, rather than cost centers.

The Bottom Line on Cisco Stock

Cisco is now a fashionable pick among technology companies, thanks to analysts preferring growth to value. Cisco revenues can be expected to grow at a high single-digit rate, its earnings a little faster, and the company’s dividend looks secure. That’s what analysts want to see right now.

Cisco’s optimism is based, however, on the assumption of a growing global economy. Buying Cisco stock right now means you’re taking that bet.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/cisco-stock-global-downturn/.

©2024 InvestorPlace Media, LLC