Cisco Systems (NASDAQ:CSCO) is set to report first-quarter 2020 earnings on Nov. 13. The earnings whisper number for CSCO stock is 83 cents per share, which is higher than analysts’ expectations for an earnings per share of 81 cents. Not surprisingly Cisco stock has been rallying in the last week. In fact, as the market was closing on Nov. 8, the CSCO stock price was up about 4% in the last month and up over 13% in 2019.
That’s the good news.
The bad news is CSCO stock is down nearly 15% from its 2019 peak near $58 per share back in July. This decline is due to concerns from investors and analysts about Cisco’s ability to find a catalyst for growth.
Cisco is transitioning from being a hardware supplier to a software and service provider, complete with recurring revenue streams. The need for data security is giving Cisco a moat from which they have been able to force their way into the market.
But long-term investors are not impressed by long-term growth forecasts. Trefis forecasts Cisco’s revenue growth rate will be cut nearly in half from a growth rate of 8.1% between 2017 and 2019 to just 4.7% by 2021.
So, while data security may help ensure that Cisco won’t lose revenue, investors are wondering where its growth will come from.
It’s All About Growth for Cisco Investors
Cisco continues to make the pivot from being exclusively a hardware provider to becoming involved in software and services. To that end, Trefis also forecasts that 25% of Cisco’s 2020 revenue ($13 billion) will come from the services side of the business. But you really have to add in about another 17% to acknowledge the fundamental shift in Cisco’s business.
In 2017, Cisco introduced its Lifecycle Advantage and Success Hub programs. Both partner training programs are one step toward Cisco’s goal of creating a recurring revenue practice. The programs boast that, “Those partners who piloted Lifecycle Advantage reported customer reach increased five times, click rates increased nine times and renew close rates increased 20 percent.”
CSCO would not be the first company to pivot into a recurring revenue model. IBM (NYSE:IBM), another company known for providing hardware and just hardware, has been making the transition to being a Software as a Service (SaaS) company. Even Apple (NASDAQ:AAPL), a Cisco partner, is considering looking into a subscription model for their iconic iPhone.
Cisco Has to Protect the Internet It Helped Create
Data security and cybersecurity give Cisco an avenue to achieve near- and long-term growth. Industry reports project the cybersecurity market will grow at a CAGR of 10.7 through 2021. The overall cost to cyberattacks was over $500 billion in 2015 and has only continued to grow. Yet, many businesses are not spending enough on date security. Worse yet, many don’t know how much they should be spending.
According to a 2016 IT Security Spending Survey published by SANS Institute, “Tracking security-related budget and cost line items to justify expenditures or document trends can be difficult because security activities cut across many business areas, including human resources, training and help desk.” This commentary remains true in 2019.
The Bottom Line on Cisco Stock
Will it or won’t it? That’s the question on investors mind. The “it” they’re referring to is growth. The problem for Cisco is that the internet, and all the products and services that go into securing it, create a moat that ensures Cisco will have revenue. However, the question is whether or not that moat is enough to be a catalyst for future growth.
When you get right down to it, Cisco is rapidly moving from being in the construction business to being in the insurance business. Building a company’s infrastructure is exciting. Maintaining a company’s data security business instills fear.
Businesses hope they never have to use Cisco’s products and systems. And they may not even know what they need. Cisco is trying to help them. The future direction of Cisco stock depends on how successful they are.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.