Shares in Cisco Systems (CSCO) continue to get an occasional lift when the market rotates to “value” stocks tied to an economic rebound. The outlook for CSCO stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks.
Cisco reports fiscal third-quarter earnings on May 19. The company is expected to return to top-line growth for the first time in six quarters.
Amid the coronavirus pandemic, corporate spending on data networks has slowed amid increased office vacancy rates. One view is that corporate networks will be less important if remote work becomes entrenched.
As a result, CSCO stock needs to hike investments in next-generation enterprise networks. Cisco aims to help corporate customers build hybrid network architectures that utilize on-premise data centers and cloud-computing infrastructure.
At its Cisco Live virtual conference in late March, Cisco touted “hybridization as a foundation block to its product strategy,” Morgan Stanley analyst Meta Marshall said in a report to clients.
One big question is whether Cisco can gain share in cloud computing data centers. In that market, Arista Networks (ANET) is Cisco’s main rival.
Cisco Stock: Transformational Acquisition Needed?
In addition, the tech icon aims to increase recurring revenue from subscription-based software and services and shift away from its core business of selling network switches and routers. Some CSCO stock bulls believe a big, transformational acquisition is needed.
Cisco has brought in a new chief financial officer, Scott Herren from Autodesk (ADSK).
Cisco stock remains one of the top U.S. tech companies in terms of cash on its balance sheet. With 4% dividend yield, CSCO stock still finds support among institutional investors. While Cisco stock provides an attractive dividend, its buyback program has slowed.
CSCO Stock Technical Analysis
From a 1990 initial public offering through early 2000, Cisco thrived as a major supplier of the hardware to build internet networks, both to telecom firms and large companies outside that sector. Cisco stock soared more than 100,000% in that period, before the dot.com bubble burst.
From the first quarter of 2016 through the end of 2017, Cisco revenue was flat or fell. Revenue began growing again, albeit in low single digits, starting in early 2018. The inflection put Cisco stock in rally mode.
After its October 2017 breakout, Cisco stock in 2019 touched new highs not seen since late 2000 during the dot.com boom. As it stands, Cisco stock does not belong to the IBD Long Term Leaders list.
Cisco earnings growth in 2018 owed much to Trump administration tax changes.
Cisco’s Growth Through Acquisitions
Much of Cisco’s revenue growth has come from acquisitions.
Cisco on Dec. 7 agreed to buy U.K.-based IMImobile, which sells cloud communications software, in a deal valued at $730 million.
In May 2020, Cisco acquired ThousandEyes, a networking intelligence company, for about $1 billion.
In 2017, Cisco acquired software maker AppDynamics for $3.7 billion. It bought BroadSoft for $1.9 billion in late 2017.
In July 2019, Cisco acquired Duo Security for $2.35 billion, marking its biggest cybersecurity acquisition since its purchase of Sourcefire in 2013. Acquiring Duo Security bolstered Cisco in an emerging category called zero trust cybersecurity.
Aside from acquisitions, new accounting rules have been a plus for revenue recognition. The rules known as ASC 606 require upfront recognition of multiyear software licenses.
CSCO Stock: Shift To Recurring Revenue
As companies shift business workloads to cloud computing services like Amazon Web Services, part of Amazon.com (AMZN), they could spend less on internal computer networks. In addition, Cisco has lost share in several large markets, though it aims to rebound in cybersecurity.
Amid the coronavirus emergency, companies have pulled back on information technology spending.
Cisco reported fiscal second-quarter earnings and revenue that topped analyst estimates while profit guidance for the current April quarter met expectations.
In the quarter ended Jan. 23, Cisco earnings rose 2% to 79 cents a share from a year earlier. Revenue came in at $12 billion, nearly flat versus the year-earlier period.
Analysts had expected Cisco earnings of 76 cents on sales of $11.92 billion.
For the current April quarter, Cisco earnings are expected to be 81 cents at the midpoint of its guidance, in line with estimates. Cisco expects revenue to climb 4.5%. Analysts had projected that revenue would rise about 3% to $12.36 billion.
However, Cisco’s third quarter of 2021 will have 14 weeks compared to 13 weeks for the same quarter in fiscal 2020. In a release, Cisco said that is “reflected in the guidance.”
In the January quarter, Cisco repurchased $801 million of its own stock. Cisco has $9.2 billion remaining in a stock buyback program.
One bright spot for CSCO stock has been sales of Catalyst 9000 computer network switches.
Also, there’s opportunity for Cisco in data center upgrades. The so-called “internet cloud” is made up of warehouse-sized data centers.
Cisco Stock: Upside From Data Centers?
They’re packed with racks of computer servers, data storage systems and networking gear. Most cloud computing data centers now use 100 gigabit-per-second communications gear. A data center upgrade cycle to 400G technology has been delayed. The big question is whether Arista Networks or Cisco will gain share in the 400G upgrade cycle.
Cisco in 2019 agreed to buy Acacia Communications, a maker of 400G devices, for $2.6 billion in cash. China’s government delayed approval of the deal. In January, Cisco upped its offer for Acacia to $4.5 billion and the deal finally closed.
Arista beat Cisco to market in cloud data centers by grabbing Microsoft, Facebook (FB) and Amazon.com (AMZN) as customers. But Cisco reportedly has gained business from Microsoft.
Also, analysts say Cisco is also well-positioned as corporate buyers shift to networking technology called software-defined wide-area networking, or SD-WAN. The technology often taps bandwidth on the public internet.
With SD-WAN, companies have less need for costly private data networks leased from telecom companies. Cisco competes with VMware (VMW), startup Aryaka, Fortinet (FTNT) and CloudGenix in the SDN market. Palo Alto Networks (PANW) recently bought CloudGenix.
According to the IBD Stock Checkup, CSCO stock holds a Relative Strength Rating of only 52 out of a possible 99. The best stocks tend to have an RS rating of 80 or better.
In addition, CSCO stock has an Accumulation/Distribution Rating of B-plus. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading. On an A+ to E scale, the rating measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
Amid a market rotation to “value” stocks that began in late 2020, Cisco stock clawed back.
CSCO Stock: Is It A Buy Now?
In March, Cisco stock formed a flat base, with an entry point of 49.44. The stock gained on new products unveiled at the virtual Cisco Live conference in late March.
As of May 11, Cisco stock traded just above a 5% buy zone. With earnings due soon, investors should wait before taking new positions. Some of Cisco’s technical ratings should be better.
Deutsche Bank analyst Matthew Nikham on April 20 initiated coverage with a hold rating.
“Cisco screens attractively from several angles, including a recovery in IT spending driving positive revenue inflections, an underlying mix shift towards software/services, and healthy profitability/FCF generation,” he said in a report. “However, we see a lack of upside to consensus estimates that would justify a more positive view, while valuation is now at a premium on both a standalone and market-relative basis.”
In the meantime, there are other options to find the best stocks to buy or watch. Check out IBD Stock Lists and other IBD content.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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