Shares in Cisco Systems (CSCO) posted a good run in 2021 amid the market’s rotation to “value” stocks tied to the U.S. economy reopening. Amid rising interest rates and supply-chain issues, CSCO stock has pulled back this year.
The outlook for Cisco stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks.
X
Cisco stock jumped 41% in 2021. Amid volatility in the tech-heavy Nasdaq, Cisco stock has retreated 19% in 2022.
Cisco’s January-quarter earnings topped estimates amid component shortages and supply-chain issues.
During the period, Cisco’s second fiscal quarter, product orders increased 33% year-over-year, marking the third straight quarter of 30%-plus order growth. Demand in the enterprise market — large companies, government agencies and medical/educational institutions —has been a bright spot, Cisco said.
Cisco continues to hike prices amid supply chain issues.
CSCO Stock: Revenue Outlook Raised
Management lifted fiscal 2022 top-line growth guidance from a range of 4.5%-6.5% to 5.5%-6.5%. The fiscal year ends in July.
JPMorgan analyst Samik Chatterjee in a report said Cisco stock is “well positioned to benefit from the combination of robust demand, better pricing as well as moderating costs.”
The Cisco board of directors authorized an additional $15 billion stock repurchase program.
Rival Arista Networks (ANET) dropped out of the IBD Leaderboard. One big question is whether Cisco can gain share in the cloud titan market vs. Arista.
On the plus side, computer networking stocks seemed to be sexy again.
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 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.
Cisco has brought in a new chief financial officer, Scott Herren from Autodesk (ADSK). The company 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. In the long run, analysts expect Cisco margins to improve as more revenue comes from software products.
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 period ended Jan. 31, Cisco earnings rose 6% to 84 cents a share from a year earlier, the company said. Revenue also rose 6% to $12.72 billion, including acquisitions. Analysts expected Cisco earnings of 81 cents on sales of $12.66 billion.
A year earlier, Cisco earnings were 79 cents a share on sales of $11.96 billion.
For the current quarter ending in April, the company forecast revenue growth of 4% at the midpoint of guidance, in line with estimates.
One bright spot for CSCO stock has been sales of the Catalyst 9000 switches. Also, there’s opportunity for Cisco in data center upgrades.
Cisco Stock: Upside From Data Centers?
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 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 this market. Palo Alto Networks (PANW) recently bought CloudGenix.
CSCO Stock: Is It A Buy Now?
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. After forming the double-base pattern, CSCO stock hit a high of 64.28 on Dec. 29.
Technical ratings have weakened.
CSCO stock currently holds a Relative Strength Rating of 45 out of a best-possible 99. The best stocks tend to have an RS rating of 80 or better.
Cisco stock also owns an IBD Composite Rating of 62 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 E, 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.
As of April 18, Cisco holds an entry point of 58.73. CSCO stock is not a buy for technical and fundamental reasons.
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.
YOU MAY ALSO LIKE
IBD Live: A New Tool For Daily Stock Market Analysis
Find Compelling Growth Stocks With IBD’s Stock Of The Day
View Breakout Stocks & Technical Analysis
Best Growth Stocks To Buy And Watch: See Updates To IBD Stock Lists
Source: https://www.investors.com/news/technology/cisco-stock-buy-now/?src=A00220&yptr=yahoo