Shares in Cisco Systems have advanced nearly 32% in 2021 amid the market's rotation to "value" stocks tied to an economic rebound. The outlook for CSCO stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks.
CSCO stock plans to hold its first analyst day in a few years on Sept. 15. Cisco stock provided mixed guidance for its fiscal first quarter of 2022.
"(First-quarter) revenue guidance was slightly above estimates, but (per-share earnings) and gross margin guidance were below expectations, impacted by ongoing supply chain constraints," Bank of America analyst Tal Liani said in a note to clients.
"(Fiscal Q4) order growth was strong, with all verticals showing solid acceleration, yet we flag some weakness in key growth areas, with security, software and subscriptions decelerating sharply, which might reflect some share losses, especially in security," Liani went on to say.
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.
Cisco Stock: Transformational Acquisition Needed?
Cisco aims to build up its Webex video conferencing platform versus Microsoft and Zoom Video Communications. 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 is Cisco's main rival.
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.
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.
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 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, 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.
Cisco stock reported July quarter earnings of 84 cents per share, up 5% from a year earlier. Revenue rose 8% to $13.1 billion, including acquisitions such as Acacia Communications.
Software revenue in the quarter was $4 billion, up 9% year-over-year.
Analysts estimated that Cisco would earn 83 cents per share on revenue of $13.04 billion, according to FactSet.
For its current fiscal first quarter ending in October, Cisco forecast profit of 80 cents versus estimates of 81 cents. Cisco forecast lower gross margins in the October quarter due to supply chain constraints.
Cisco projected revenue growth of 8.5% at the midpoint of its guidance, topping estimates of 7.5% to $12.83 billion.
For full-year, fiscal 2022 Cisco said it expects revenue growth in a range of 5% to 7%, slowing from the October quarter. Even so, Cisco's revenue 2022 outlook topped estimates of 4.5%.
Year-over-year revenue comparisons for Cisco will be tougher in the back half of fiscal 2022.
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 and Amazon.com 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, startup Aryaka, Fortinet and CloudGenix in the SDN market. Palo Alto Networks recently bought CloudGenix.
CSCO Stock: Is It A Buy Now?
According to the IBD Stock Checkup, CSCO stock holds a Relative Strength Rating of 83 out of a possible 99. The best stocks tend to have an RS rating of 80 or better.
In addition, 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 Aug. 25, CSCO stock trades above a buy zone, with a flat base entry point of 55.45.
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