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 retreated this year.
Analysts with a bullish view of CSCO stock expect the company to gain share in the cloud titan market vs. Arista Networks (ANET). Arista beat Cisco to market in cloud data centers by grabbing Microsoft (MSFT), Facebook (FB) and Amazon.com (AMZN) as customers.
Cisco Stock Versus ANET Stock
But some analysts expect Arista to stay the leader in cloud networking. ANET stock was featured as the IBD Stock of the Day on Sept. 30.
“We believe the strong mid-teens growth rate for ANET will be sustainable for a few more years,” said Barclays analyst Tim Long in a report. “We expect market share in the data center switching market to continue to move higher. ANET has successfully diversified its revenues from largest customers Microsoft and Facebook.”
He added: “For the cloud business, Cisco doubled relative share from 2019 to 2021, but has since stalled. The move to a more software-based model has been slow, and product backlog growth has been a negative impact. Regardless, we see peer companies growing faster in software despite similar backlog dynamics, likely highlighting weakness of some Cisco stand-alone software offerings.”
But spending on cloud infrastructure is expected to slow in 2023. Third quarter earnings for ANET stock are due Oct. 31.
Cisco stock climbed on its fiscal fourth-quarter earnings report on Aug. 17. Cisco issued better-than-expected fiscal 2023 revenue guidance. But analysts debated the outlook for profit margins as supply chain issues ease.
For fiscal 2023, Cisco said it expects sales growth in a range of 4% to 6% vs. Wall Street estimates of 3% sales growth to $52.7 billion. Cisco’s earnings guidance in a range of $3.49 to $3.56 a share was in line with analyst views.
The outlook for Cisco stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks. Worries over a U.S. recession are climbing.
CSCO Stock Underperforms Vs. S&P 500
Cisco stock jumped 41% in 2021. Amid a bear market in the tech-heavy Nasdaq composite, Cisco stock has retreated about 32% in 2022. Also, CSCO stock has underperformed vs. the S&P 500, which is down 22%.
Investors should be cautious of any buys amid the bear market and Fed rate hikes.
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.
But Cisco’s pivot to subscription software revenue has stalled. Software has hovered around 30% of total revenue for the last seven quarters.
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?
There’s more than $20 billion in cash on the balance sheet of CSCO stock, says Moody’s. The company has slowed buybacks of its own stock. Some analysts speculate Cisco could make a large acquisition of a software company.
Cisco aims to build up its Webex video conferencing platform versus Microsoft and Zoom Video Communications (ZM). It recently acquired Socio Labs to boost Webex events. Long range, Cisco is working on holographic communications.
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.
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: October Quarter Guidance
For the July quarter, adjusted earnings came in at 83 cents per share, down 1% from a year earlier. Revenue was flat at $13.1 billion, including acquisitions.
Analysts estimated that Cisco would earn 82 cents per share on revenue of $12.73 billion, according to FactSet.
For the October quarter, Cisco forecast profit in a range of 82 cents to 84 cents vs. estimates of 84 cents. Cisco projected revenue growth of 2% to 4%, compared with projections for flat sales growth.
Cisco Stock: Upside From Data Centers?
One bright spot for CSCO stock has been sales of the Catalyst 9000 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.
Cisco in 2019 agreed to buy Acacia Communications for $2.6 billion in cash. China’s government delayed approval of the deal. In January 2021, Cisco upped its offer for Acacia to $4.5 billion and the deal finally closed.
On the plus side, computer networking stocks seem to be sexy again.
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.
The build-out of 5G wireless networks has yet to emerge as a growth driver for CSCO stock. Cisco in 2021 said it would partner with Dish Network (DISH) to sell 5G business services to large companies.
CSCO Stock: Tech Icon
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.
After its October 2017 breakout, Cisco stock in 2019 touched new highs not seen since late 2000 during the dot.com boom.
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, 2021
Following the Aug. 17 earnings report, some technical ratings have improved.
CSCO Stock: Is It A Buy Now?
CSCO stock currently holds a Relative Strength Rating of 48 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 73 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, 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 Oct. 22, CSCO stock needs to form a new base to be actionable.
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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