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.
The outlook for Cisco stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks.
One question is whether Cisco could make a large acquisition ($10 billion-plus) of an enterprise software maker. Its acquisitions have focused on software subscription businesses.
“We believe main investor considerations on whether a future M&A is a ‘good’ deal will primarily rely on how will the integration of a deal of this size and type (software
security) be integrated differently into CSCO compared to prior deals that investors have grown very critical of CSCO for,” said Credit Suisse analyst Sami Badri in a report.
CSCO Stock: Supply Chain Issues Remain
Cisco stock jumped 41% in 2021. Amid volatility in the tech-heavy Nasdaq composite, Cisco stock has retreated 32% in 2022.
Cisco reported fiscal third-quarter earnings that edged by estimates while revenue missed Wall Street targets. Management blamed weak guidance — including a surprise revenue decline in the July quarter — on China’s Covid lockdown and supply chain issues.
Analysts with a bullish view of CSCO stock expect the company to gain share in the cloud titan market vs. Arista Networks (ANET).
On the plus side, computer networking stocks seem to be sexy again.
Cisco Stock: Shift To Software, Services
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 expects subscription revenue to account for 50% of total revenue in fiscal 2025, up from 44% in fiscal 2021.
Using fiscal 2021 as the base year, Cisco said it expects 5% to 7% sales growth through fiscal 2025. The forecast includes acquisitions.
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 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: Weak July Quarter Guidance
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 April 30, Cisco earnings rose 5% to 87 cents a share from a year earlier, the company said. Revenue came in flat at $12.8 billion, including acquisitions.
A year earlier, Cisco earnings were 83 cents a share on sales of $12.8 billion. Analysts expected Cisco earnings of 86 cents a share on sales of $13.34 billion.
Russia’s invasion of Ukraine lowered revenue by $200 million, Cisco said.
Cisco’s product order growth had been a bright spot in the three previous quarters. Product order growth slowed to 8% in the April quarter versus 33% in its fiscal second quarter.
For the current quarter ending in July, the company forecasts earnings of 80 cents a share vs. estimates of 92 cent profit for Cisco stock.
Meanwhile, the company said it expects revenue to decline 1% to 5% versus projections for 5.9% growth.
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.
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 33 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 38 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 D-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.
As of the market open on July 5, 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.
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