Cisco Stock Is Ready to Prove That Its Comeback Is Real

CSCO stock - Cisco Stock Is Ready to Prove That Its Comeback Is Real

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There’s one clear question when it comes to shares of Cisco Systems (NASDAQ:CSCO). Is Cisco stock no different than Oracle (NYSE:ORCL) and IBM (NYSE:IBM), where modest earnings multiples are justified by near-zero growth expectations? Or is CSCO stock at the moment something closer to Microsoft (NASDAQ:MSFT): a giant capable of reinventing itself and accelerating growth?

For years, CSCO stock looked much like the former. Over a stretch from the beginning of 2004 to the end of 2015, Cisco stock basically didn’t move. Networking stocks across the board were taking hits, admittedly. Rival Juniper Networks (NYSE:JNPR) hardly fared much better. But that was kind of the point: Cisco had the largest share of an unattractive market. That’s a tough bull case, particularly in tech.

It has been a different story of late, however. Cisco has risen 38% in the past year, and by over half from last summer’s lows. Solid earnings and mid- to long-term catalysts have changed the perception surrounding CSCO stock.

Fiscal Q1 results on Wednesday afternoon, then, look rather important. Cisco stock has stalled out a bit: it trades pretty much in line with March highs. Analysts appear bullish, but cautiously so, with the average target price suggesting 11% upside. If the release and guidance for the second quarter can support the optimism of the past few quarters, Cisco stock can re-rate higher. Any disappointment, though, might leave investors to wonder if this really is the same old CSCO.

Will Earnings Boost Cisco Stock?

History suggests investors should expect an earnings beat from Cisco on Wednesday. The company hasn’t missed estimates on either the top or bottom lines since early 2014. Consensus doesn’t look particularly aggressive, either, with the Street looking for 6% revenue growth and an 18% increase in earnings-per-share (with some help from tax reform).

That said, guidance will be rather important here. At the moment, estimates project a deceleration in growth for the rest of the year, with full-year consensus projecting sales will rise just 4.5%. Acquisitions — most notably that of BroadSoft — are a factor as they are lapped. But fundamentally, there’s a clear narrative that can emerge from strong results and strong guidance.

If Cisco can show the market not only that growth is strong now, but that it should continue into calendar 2019 (at least), this looks like a much stronger story. And with CSCO stock trading at just 14x FY20 EPS estimates, there’s a nice potential combination of higher earnings estimates and a higher multiple. It was that steady combination that allowed Microsoft stock to quadruple over five years, and Cisco stock can set out on a similar, if likely less dramatic, path with good numbers on Wednesday.

And it does look like the numbers could lead to a big move in CSCO stock. The options market at the moment is pricing in a roughly 6% move this week — a relatively high number for a relatively low-growth large-cap. That suggests that there may be more volatility than usual in CSCO this week, and it highlights the fact that this is going to be a closely watched report.

What Else to Watch for In CSCO Stock

That said, there’s much more of interest here than just the headline numbers. The specific catalysts that have helped Cisco stock of late are going to be a primary focus of the post-earnings conference call.

Certainly, results from the aptly named Catalyst 9000 series switches will be closely watched. As Neil George detailed back in August, those products have allowed Cisco to bundle software with hardware, adding the type of recurring revenue tech investors are looking for these days. Investors need to watch the deferred revenue line on the balance sheet to understand the growth in deferred revenue from those subscription sales.

The pace and impact of the 5G rollout, which could and should boost mid-term sales and profits, will get some play. Cloud networking and SD-WAN need to be strong.

The good news, qualitatively, is that Cisco has a number of areas that can drive growth in the coming quarters, and the coming years. The risk, even with valuation multiples reasonably low, is that a stumble in any of them could undercut the bull case, particularly in a clearly uncertain market. For now, the rewards seem well worth the risk because it seems highly unlikely CSCO stock can plunge given the current modest multiple. But there’s a path toward bigger gains going forward — a path that can open up with a solid quarter on Wednesday.

As of this writing, Vince Martin has no positions in any securities mentioned.

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