Shares in Cisco Systems (CSCO) posted a good run this year amid the market’s rotation to “value” stocks tied to the U.S. economy reopening. The outlook for CSCO stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks.
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In a bullish move, CSCO stock late last year broke out from a double-bottom base. The double-bottom chart pattern looks sort of like the letter “W.” It features two distinct sell-offs.
Cisco stock jumped 41% in 2021. Will it take a breather this year?
The technical ratings of CSCO stock have improved. Rival Arista Networks (ANET) belongs to the IBD Leaderboard. And, computer networking stocks seem to be sexy again.
But Cisco stock tumbled on its fiscal first-quarter earnings report. Revenue missed estimates while profit edged by Wall Street targets. Its January quarter revenue outlook came in below expectations amid component shortages and supply chain issues.
Cisco Stock: Shift To Software, Services
At an analyst day Sept. 15, management updated guidance for CSCO stock. 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.
Cisco said it expects subscription revenue to account for 50% of total revenue in fiscal 2025, up from 44% in fiscal 2021.
Using the just-completed fiscal 2021 as the base year, Cisco said it expects 5% to 7% sales growth through fiscal 2025. The forecast includes acquisitions.
In addition, Cisco management outlined how its total addressable market (TAM) will reach $400 billion by 2025, up from the current $260 billion.
During the coronavirus pandemic, corporate spending on data networks slowed amid increased office vacancy rates. One view is that corporate networks will be less important if remote work becomes entrenched.
As a result, Cisco stock needs to hike investments in next-generation enterprise networks. The company aims to help corporate customers build hybrid network architectures that utilize on-premise data centers and cloud-computing infrastructure.
CSCO Stock: Transformational Acquisition Needed?
Cisco aims to build up its Webex video conferencing platform versus Microsoft (MSFT) and Zoom Video Communications (ZM). It recently acquired Socio Labs to boost Webex events.
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 note 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 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.
The build-out of 5G wireless networks has yet to emerge as a growth driver for CSCO stock. Cisco on Nov. 16 said it would partner with Dish Network (DISH) to sell 5G business services to large companies.
Cisco 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 in late 2019 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 Software And Services
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.
For the October quarter, Cisco earnings rose 8% to 82 cents a share from a year earlier, the company said. Revenue also rose 8% to $12.9 billion, including acquisitions.
Analysts expected Cisco earnings of 81 cents a share on sales of $12.99 billion.
In addition, Cisco said product orders increased 33% from a year earlier. “Our sense is that order book is getting pumped up by customers getting orders in ahead of Cisco’s price increases,” said Jefferies analyst George Notter in a report.
For the current quarter ending in January, the company forecasted earnings of 81 cents a share vs. estimates of 82 cent profit for Cisco stock.
The company said it expects revenue growth of 5.5% at the midpoint of its guidance, missing projections for 7.2% growth.
Cisco repurchased $256 million of its own stock in the October quarter. It has $7.7 billion remaining in stock buyback authorization.
Cisco Stock: Gross Margins Impacted By Supply Chain
Global chip shortages have slowed manufacturing. One question has been Cisco’s ability to pass on higher costs to customers through product price hikes. In the long run, analysts expect Cisco margins to improve as more revenue comes from software products.
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.
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 or Cisco will gain share in the 400G upgrade cycle.
Cisco Stock: Upside From Data Centers?
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.
CSCO Stock: Is It A Buy Now?
In addition, CSCO stock holds a Relative Strength Rating of 89 out of a best-possible 99. The best stocks tend to have an RS rating of 80 or better.
Cisco stock owned an IBD Composite Rating of 90 out of a best possible 99, according to IBD Stock Checkup.
IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
CSCO stock has an Accumulation/Distribution Rating of B-minus, according to IBD MarketSmith analysis. 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.
Cisco stock holds an entry point of 58.73. As of the market open on Jan. 3, CSCO stock is extended and trades above a 5% buy zone.
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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