Cisco Systems (NASDAQ:CSCO) stock has been punished since the release of Q1 FY20 earnings results that beat on the top and bottom lines for the quarter, which ended Oct. 26. What’s battered CSCO stock since the Nov. 13 results is management’s forecast for revenue declines in the fiscal second quarter.
So far CSCO shareholders have not had a great 2019. Year-to-date the shares are up about 4%. Let us now take a look if long-term shareholders should consider buying into Cisco stock at current price levels.
Guidance Failed to Impress
Cisco remains is a global heavyweight in the networking and communications equipment market. Revenue and earnings came at $13.2 billion and 84 cents per share, respectively, vs. $13.09 billion and 81 cents per share as expected by Wall Street. During the quarter, revenue grew 1% on an annualized basis.
The group reports revenue under two headings: Product (about 75% of revenue) and Service (about 25%). Cisco makes products and provides services that help customers transport data, voice and video traffic. Under its Product business, Cisco has infrastructure platforms, networking applications, as well as security products. Service revenue comes from providing technical consulting and related support services.
For Q2 the networking giant now expects 75 cents-77 cents in earnings per share and an annualized revenue decline of 3%-5%. Analysts were instead expecting 79 cents in earnings per share and about 2.6% revenue growth. Management’s discussion hinted a decline in corporate tech spending, which investors did not regard as a positive sign for the next quarter.
In late October, rival Arista Networks (NYSE:ANET) also warned about the next quarter as a large customer was cutting orders. Maybe investors should have already expected a similar dismal outlook form Cisco.
Ahead of the after-market Nov. 13 release of the quarterly results, CSCO stock price closed at $48.46. The next day, it gapped down to open at $45.56. On Nov. 18, it saw a recent low of $44.44.
Tailwinds Behind CSCO Stock
Despite worries over the tech market and spending levels, not everyone is pessimistic about the future of Cisco shares. In September, Evercore ISI analyst Amit Daryanani initiated CSCO stock coverage with a price target of $60, citing multiple catalysts that could help the share price go higher.
Cisco, which has long been known for its networking and communications hardware, such as routers and switches, has lately been diversifying into software and cloud support services. Many analysts and investors have welcomed this strategic move that is likely to add revenues, primarily from reoccurring cloud-related subscription services.
The company offers its products and services to a wide range of customers, including service providers, such as telecommunication carriers and and wireless service providers, public sector, and commercial businesses of different sizes.
A recent thesis by Apoorva Parikh of Massachusetts Institute of Technology highlights that “Cisco’s security business segment with over $2 billion in revenue in fiscal 2018, makes Cisco one of the largest enterprise security players in the market.”
Parikh continues, “[c]ybersecurity market is huge. Research firm IDC estimates security solutions spending will hit $92 billion in 2018 and continue to grow at CAGR of 10% to reach over $130 billion by 2022 … Cisco is well positioned to capture this massive market.”
As CSCO’s global geographical reach is rather broad, the company may be spared any further damage that may be caused by the ongoing trade war with China. For example, the company is expecting to triple its India customer base, where about two-thirds of all small- and- medium enterprises (SMEs) have no online presence.
Cisco is Cash Rich
CSCO’s reserves of over $33 billion in cash and short-term investments enables it to be flexible, especially when it comes to potential acquisitions that may help the company increase revenue through software and subscription-based business. During the quarter, management completed the acquisition of customer experience management company CloudCherry and speech recognition company Voicea.
Earlier in 2019, the group bought Acacia Communications for $2.6 billion. Cisco management is hopeful that this purchase will help the group meet customer demand for more robust networks and contribute to revenue growth soon.
All that followed 2018, CSCO had acquired a young start-up, Duo Security, to strengthen its offering of integrated cybersecurity products and solutions to customers, especially in multi-cloud computing and storage environments. Previously, there had been ongoing rumors that Cisco may eventually acquire Red Hat with which it had partnered for many years. However, Red Hat was finally acquired by International Business Machines (NYSE:IBM).
The Q1 earnings statement also showed that Cisco had managed to repay more than $6 billion in debt. Going forward, this debt reduction will translate into less interest expenses.
Despite the strength of Cisco’s balance sheet and the management’s strategic moves to increase the revenue base, it may be several weeks before CSCO stock may stabilize.
Where CSCO Stock Price is Now
If you have not looked at the price chart over the past year, you would not have known that it had been a volatile one for CSCO shareholders. In the past 12 months, Cisco stock is down about 1%.
Yet its 52-week range has been $40.25 (Jan. 24, 2018) – $58.26 (July 16, 2019). CSCO stock is currently hovering around $45.
Although Cisco stock may look quite appealing at this lower price from a fundamental basis, I’m expecting some short-term volatility and profit taking in the broader tech sector.
Therefore, the setback in CSCO shares are likely to continue for several more weeks. Cisco stock may be one of the first tech stocks to test its 52- week low at $40.25 and make a double bottom around that level where it has strong support.
Those investors who pay attention to moving averages and oscillators should note that the technical message has become a “sell.” CSCO shares will need to stabilize and build a base again before a long-term sustained leg up can occur.
Bottom Line on Cisco Systems Stock
Although Cisco Systems stock offers long-term investment opportunities on a strong fundamental basis, rest of the year may bring more volatility in technology stocks like CSCO. However, investors may regard any further decline in the stock price as an opportunity to buy into the shares. I expect Cisco to bounce back from the recent sell-off before too long.
Furthermore, CSCO’s current annual average dividend yield of 3.1% makes it an attractive buy for dividend growth investors. On Sept. 20, CSCO declared a quarterly stock dividend of 35 cents per share, payable on Oct. 23 to shareholders of record on Oct. 4. Cisco stock’s next ex-dividend date is expected in early January 2020.
As of this writing, Tezcan Gecgil holds CSCO covered calls (Nov. 22 expiry).