Is the Cisco Systems stock a buy? | The variegated fool

Over the last many years have Cisco Systems (NASDAQ: CSCO) has been working to update its older portfolio of services to better compete against various innovative high-growth growth players with which it competes in its various markets. But due to the company’s large scale, the transition has taken some time, and it helped the tech giant report a fifth consecutive quarter over the last year.

Recent performance has given Cisco a valuation that meets modest expectations. Does this suggest that the tech giant’s stock is a purchase at the moment? Or is it a value trap?

Cisco had declining revenue on an annual basis

Cisco remains the dominant provider of networking solutions with its cross-network hardware connectors and routers. Over the past many years, it has developed and acquired companies to create cross-selling opportunities with its core networking activities. For example, it has become a major cybersecurity provider and it proposes consistent communication solutions.

IT technician with a laptop and engineer talking in data center while walking next to server stand.

Image source: Getty Images.

Yet, due to its inherited hardware business, Cisco has had declining revenue over the past five quarters. In the last quarter, revenue fell slightly to $ 11.96 billion, down from $ 12.01 billion a year ago.

In particular, the company’s largest segment, infrastructure platforms (which include older hardware products), fell 3% year-over-year to $ 6.4 billion.

In contrast, Cisco’s transition to subscription-based software led to some encouraging results. For example, cybersecurity grew 10% year-over-year to $ 822 million thanks to the cloud-based identity and telecommuting solutions Duo and Umbrella. And during earnings calls, CEO Chuck Robbins mentioned that the communications platform WebEx generated double-digit revenue growth with nearly 600 million quarterly average users.

High-growth opportunities still exist for Cisco

In addition to these short-term results, Robbins provided, for the first time, additional information about the company’s performance with web scale (large cloud) providers. He said the web-scale business has become meaningful at 25% of the service provider segment after delivering its “fifth consecutive quarter with very fast order growth, rising to triple digits.”

This development bodes well for Cisco’s long-term potential. In fact, over the last many years, the company has had not managed to develop a competitive cloud offering against its rival Arista Networks. As a result, its market share in the fast data center switching market fell from 64.7% in 2015 to 43.7% in the first half of last year.

But Cisco is finally gaining traction in the network cloud computing area thanks to its new Cisco Silicon One offering, released in December 2019. With the new product, the company was not anchored in monolithic solutions that contributed to huge profits over the last decades; finally, it separated hardware and software to better meet the demand of cloud providers and service providers.

So Cisco eventually showed that it could adapt and compete against agile and innovative smaller players, which bodes well for its future as it seeks to tackle extra high-growth opportunities with new offerings.

For example, in October, it unveiled a partnership to propose an edge-to-edge computing platform as a service for service providers, enabling the company to compete with high-growth players, such as Quickly and Cloudflare, within the content delivery network and edge computing areas. These technologies represent a strong growth potential as they help to improve the response time of online services.

Robbins also said in the earnings call that the company is working on a platform with full stack observability, where customers monitor their complete computing infrastructures and applications to improve performance and anticipate problems. This means that Cisco will look to compete against high-growth specialized observers such as Dynatrace and Datadog.

Cisco trades at a reasonable price

Looking ahead, management expects annual revenue growth from 3.5% to 5.5% during the current quarter, ending May 1, which looks good. But compared to last year, the current quarter includes an extra week that should contribute to approx. 2% to 3% of revenue growth year-over-year, according to CFO Scott Herren. And in the previous year’s period, revenue fell by 8% year-on-year, providing an easy comparison for the current quarter.

So given Cisco’s unexciting results and guidance, the stock is trading with a modest forward price to earnings ratio of 14.3.

However, the recent encouraging development with cloud providers online shows that the tech giant is able to update its older portfolio with competitive offerings in growth areas. Thus, as the market does not price in Cisco growth opportunities, investors should consider buying technical warehouse.

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