Cisco Stock May Be a Great Value Name

Cisco stock checks all the right value boxes; now CSCO just needs to grow

Is Cisco (NASDAQ:CSCO) an underappreciated value stock or just a dog? That’s probably the question many Cisco stock owners are asking after another disappointing year from the networking giant. CSCO stock is now down 6% over the past year and has posted a surprising 23% decline over the past six months. That’s a huge disparity from the broader tech stock market; the Nasdaq 100 (NASDAQ:QQQ) is up 12% over the past six months and has climbed 35% in 2019.

Cisco had been faring better in recent years, with CSCO stock price doubling between 2015 and its  2018 peak of nearly $60 per share.

Since then, however, Cisco stock has fallen back to $45 while tech continues to power higher. Traders have sold CSCO stock off yet again following the company’s recent weak forward guidance. Not surprisingly, the trade war and the delays of the 5G rollout are having a negative impact on Cisco’s momentum.

More generally, however, broader fundamental questions linger around Cisco stock. What’s next for the company? Will it ever become a tech growth company again? Is there life after networking equipment for Cisco stock?

Cisco Hopes That Software and Services Can Bring Back Its Growth

The obvious problem with the bullish thesis on Cisco stock  now is that CSCO hasn’t grown much. In 2013, for example, Cisco reported $48 billion of revenue. Over the past 12 months, its top line came in at $51 billion. Less than 10% revenue growth over the past six years trails inflation and leaves investors wondering if and when Cisco will be able to find a second act.

However, Cisco has a plan. It’s moving into businesses beyond vanilla networking. For example, CEO Chuck Robbins noted that the company’s secure user identity access platform, Duo, continues to grow nicely. Cisco bought Duo for $2.3 billion last year and can help ramp up its growth with its unparalleled size and customer base.

Not only is Cisco investing more heavily in recurring revenue fields such as security, but it’s changing its pricing strategy. It’s allowing its customers to pay for some of its new high-end switches, such as the Catalyst 9000 series, through long-term, multi-year licensing deals rather than one-time payments.

As more of Cisco’s business moves to this sort of subscription business model, its earnings will become more predictable. Furthermore,  its susceptibility to short-term hits such as the current trade war and 5G delays will decline. Wall Street absolutely loves recurring service revenues, so the company’s decision to embrace that model should be very positive for Cisco stock.

Slumbering Tech Giants Can Turn Things Around

Other giant tech companies have managed to return to growth after long periods of slumber. Look at Microsoft (NASDAQ:MSFT), whose  cloud business has made it very successful after years of missing other emerging tech trends. MSFT stock went from a dead money stock with very low valuations to the world’s most valuable company. Intel’s (NASDAQ:INTC) fortunes have also rebounded over the past couple of years as its growth initiatives are starting to outshine the drag from its no-growth central processing unit  business.

Like Intel and Microsoft earlier this decade, Cisco is facing substantial doubts about its long-term outlook. The move to the cloud is clearly moving tech spending away from Cisco’s dominant network equipment solutions. Cisco itself seems to realize this. That’s why it’s focusing on obtaining the majority of its revenue from software and services going forward.

Also, Cisco is trying to use M&A to enter more growth-focused spaces. Look at its reported effort to buy hyper-growth, software-as-a-service play Datadog (NASDAQ:DDOG) for around $7 billion recently. Datadog, however, turned Cisco down and went public instead.

But Cisco’s fantastic balance sheet and stable cash flows give it tons of time to gradually evolve its business toward changing technology trends. Such moves don’t always work; IBM (NYSE:IBM), for example, has struggled to find a path back to organic growth. But when it comes to companies with strong balance sheets and time, the odds are generally in investors’ favor, and that should be the case for the owners of Cisco stock.

The Verdict on CSCO Stock

Cisco stock certainly isn’t in bad shape. It may feel like the trade war is going to drag on forever, but it will be resolved sooner or later. And the owners of Cisco stock aren’t paying much for the possibility of a brighter future.

Trading at just 13 times its forward earnings, CSCO stock is one of the cheaper big tech names out there today. Cisco stock also offers investors a dividend yield of over 3%. With Cisco’s $15 billion a year or so in cash flow, it has plenty left over after the dividend.

That has allowed the company to buy back lots of Cisco stock and acquire dozens of companies in recent years. With this sort of capital allocation strategy, patient owners of CSCO stock have multiple ways to win.

At the time of this writing, Ian Bezek owned DDOG, IBM, and INTC stock. You can reach him on Twitter at @irbezek.