Cisco Systems (NASDAQ:CSCO) is best known as a giant in the networking hardware market. However, the company has been pursuing a strategy of diversification, which has provided some extra juice to Cisco stock.
In particular, a series of acquisitions has helped Cisco to expand into software and cybersecurity solutions. Last summer, growing revenue — helped in no small part by those acquisitions — was a key factor in driving Cisco stock to highs not seen since 2000, with CSCO topping $58 in July.
A pair of quarters with weaker-than-expected guidance pulled the rug out from under CSCO stock, though. After dropping to $43.52 on Dec. 5, CSCO has rebounded, ending the year with a $47.96 close. That’s a modest 12% gain for 2019, but a drop of 17% from its highs in July.
Will the current Cisco stock recovery continue into 2020?
CSCO Stock Price Performance
Cisco’s biggest competition in its core networking business is Juniper Networks (NYSE:JNPR). While Cisco stock posted a 12% gain for 2019, Juniper was in the red, losing nearly 8% of its value in 2019.
Another key competitor is Arista Networks (NYSE:ANET), which also slipped in 2019, closing the year down just over 1%. In that context, the performance of CSCO stock in 2019 seems much more solid.
The investment Analysts polled by The Wall Street Journal have Cisco stock rated as a “buy” despite its poor performance in the second half of 2019. They also see upside for the stock, with a $52.70 average 12-month price target. Those analysts are not nearly so optimistic about Juniper or Arista Networks stock, both of which get a “hold” rating.
Growth Strategy Compared to IBM
On some level, Cisco has been a competitor with IBM (NYSE:IBM), although the two were more into collaboration in 2019. The trajectories of the two companies are often compared. Both are old school technology giants that came to dominate their markets. That domination meant meaningful revenue growth required moving into promising new business areas. However, the success of their respective strategies shows markedly different results.
If you look at CSCO over the past five years, it has delivered nearly 80% growth — even after the slide in the second half of 2019. IBM, on the other hand, has struggled. Over the past five years, IBM stock is down 17%.
“Cisco has been doing something IBM didn’t — the acquiring and integrating of scores of other smaller technology companies,” Long Island University Economics professor Panos Mourdoukoutas wrote in Forbes.
While IBM has been largely focused with trying to trying to change from within, Cisco has augmented its core networking business by buying into promising areas of growth.
This has included a strong entry into workplace collaboration with the acquisition of Webex in 2007, and enterprise cybersecurity with Duo Security in 2018. Last year’s $2.6 billion acquisition of Acacia Communications strengthens the company’s position in data center installations, through high-speed optical data transmission.
In addition, Cisco has done a good job of integrating acquisitions into its portfolio and into the marketplace to make them even more enticing for customers. For example, last November, the company announced Cisco Webex Meetings would be partnering with Microsoft’s (NASDAQ:MSFT) Teams.
The China Factor
There has been some thought that warming trade relations with China could provide a boost to CSCO stock in 2020. InvestorPlace’s Vince Martin points out that Cisco’s business in China was down 31% in the last quarter.
However, China’s Huawei is a formidable global competitor for networking infrastructure. Any gains made by Cisco as a result of a thaw in the trade war with China could well be offset by loosening of restrictions against Huawei.
Bottom Line on Cisco Stock
At this point, the likelihood that the CSCO stock price will continue its recovery in 2020 seems good.
Factors such as a weakness for demand in networking equipment that led to its slide in the second half of 2019 are expected to be offset by telecommunications companies investing heavily in 5G rollout. Meanwhile, CSCO’s acquisition and integration strategy has been successful and shows no sign of slowing.
With their $52.70 average 12-month price target, investment analysts don’t see Cisco stock hitting the 19-year highs of last summer, but that’s still 10% upside.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.