Shares in Cisco Systems (CSCO) lagged the S&P 500 in 2020. But Cisco stock climbed late last year amid a market rotation to “value” stocks. Expectations for CSCO stock rose as analysts pondered a rebound in corporate spending on information technology in 2021 if the coronavirus emergency eases.
Heading into Cisco’s fiscal second-quarter earnings report on Feb. 9, the computer networking giant faced numerous questions. 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.
In the January quarter, infrastructure platform revenue fell 3% year-over-year, spooking some investors. Product orders from government agencies picked up. But enterprise spending remained below normal levels.
Telecom industry spending on stand-alone, core 5G wireless networks has yet to kick in.
“Expectations for Cisco have been creeping up. Cisco is seeing a rebound, but the magnitude is underwhelming,” Neeham analyst Alex Henderson said in a review of Cisco’s results and April-quarter guidance.
At Raymond James, analyst Simon Leopold said in a report to clients: “Demand and orders are improving, but component shortages, the pandemic and currency exchange rates present challenges.”
One big question is whether Cisco can gain more traction 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.
In addition, the tech icon may need to hike investments to gain share in next-generation enterprise networks. Cisco aims to migrate from on-premise data centers to hybrid cloud-computing infrastructure.
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, 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.
Cisco Stock: Upside From Data Centers?
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 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.
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 has an Accumulation/Distribution Rating of A-minus. 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 in June formed a flat base, forging a new buy point at 48.39. However, shares retreated in August and September on disappointing October quarter guidance. Cisco stock hit a low of 35.28 on Oct. 29.
Amid a market rotation to “value” stocks in late 2020, Cisco stock clawed back.
Heading into its fiscal Q2 earnings report, CSCO stock rallied and briefly touched a buy point. But shares pulled back on April quarter guidance. CSCO stock needs to form a new base that provides an entry point.
For technical and fundamental reasons, CSCO stock is not a buy.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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