Cisco Systems, Inc.: Why the 20% Gain in CSCO Stock is Just a Start

Cisco Systems, Inc.: Why the 20% Gain in CSCO Stock is Just a Start
iStock.com/wellesenterprises

Big Upside in Cisco Stock?

In December, Cisco Systems, Inc. (NASDAQ:CSCO) announced a plan for an acquisition.

It wasn’t a big deal in terms of monetary value. Cisco was going to pay just $660.0 million for the company, which is not a substantial amount, considering that Cisco has a market capitalization of more than $200.0 billion.

And because the stock market was plummeting at the time, nobody really paid much attention to it. In fact, in the week following that announcement, CSCO stock dropped 8.9%.

On February 6, Cisco completed the acquisition. While the deal didn’t mark any milestone for the San Jose, California-based technology conglomerate, it did serve as a reminder for one thing: Cisco Systems, Inc. is still at the frontier of the networking equipment business.

Advertisement

You see, the company it bought was Luxtera, Inc., a privately-held semiconductor company headquartered in Carlsbad, California.

Luxtera specializes in using silicon photonics to build integrated optics capabilities for webscale companies, enterprise data centers, service providers, and other companies. (Source: “Cisco Announces Intent to Acquire Silicon Photonics Leader, Luxtera,” Cisco Systems, Inc., December 18, 2018.)

To put it simply, silicon photonics allow data to be transferred among computer chips by optical rays, and optical rays can carry a lot more data in less time than electrical conductors.

By acquiring Luxtera, Cisco will have the capability to offer faster networking equipment, which could play a key role in emerging applications like distributed cloud, mobility, and the “Internet of Things.”

Mind you, Cisco Systems, Inc. is already dominating the networking business. According to Statista, Cisco had a 55.1% share in the global enterprise networks market in the company’s fiscal-year 2018. (Source: “Market share of enterprise network vendors worldwide from 2015 to 2018,” Statista, last accessed March 1, 2018.)

Cisco Systems, Inc. Is Running a Growing Business

Despite being the most established player in the industry, Cisco is still growing.

According to its latest earnings report, Cisco generated $12.4 billion in revenue in the second quarter of its fiscal-year 2019, which ended January 26. This represented a seven-percent increase year-over-year. (Source: “Cisco Reports Second Quarter earnings,” Cisco Systems, Inc., February 13, 2019.)

Product revenue growth was across the board. Compared to the year-ago period, Cisco’s applications revenue grew 24%, security revenue grew 18%, and infrastructure platform revenue grew six percent.

The bottom line improved as well. For the quarter, Cisco’s adjusted earnings came in at $0.73 per share, marking a 15.9% increase from the $0.63 per share earned in the same year-ago period.

Note that, at the end of the fiscal quarter, Cisco Systems, Inc. had cash, cash equivalents, and investments of $40.4 billion. Having such a strong cash position means the company has the ability to return value to investors through dividends and share repurchases.

Indeed, Cisco has just raised its quarterly dividend rate by six percent and added another $15.0 billion to its stock buyback authorization.

At the same time, the size of Cisco’s cash pile means, if the company sees another acquisition opportunity, it will have plenty of resources to pursue it.

The best could be yet to come for this company. According to Cisco’s “Visual Networking Index,” global Internet traffic is expected to increase threefold in the next five years. (Source: “Cisco Visual Networking Index: Forecast and Trends, 2017–2022 White Paper,” Cisco Systems, Inc., last accessed March 1, 2019.)

That will lead to increasing demand for Internet bandwidth. And with Cisco’s silicon and optics capabilities, the company stands ready to capitalize on this trend.

Cisco Stock Chart

As you can see from the following CSCO stock chart, investors have started to take note of this tech giant. Year-to-date, Cisco stock has surged nearly 20%.

Chart Courtesy of StockCharts.com

Analyst Take

Usually when a company is delivering strong financials and is in a great position for growth, its stock would be expensive. But that’s not really the case for Cisco Systems, Inc.

Despite its recent rally, CSCO stock is trading at just 18.7 times its earnings, which is lower than the S&P 500 index’s average price-to-earnings multiple of 21.4 times. If you use the company’s expected earnings for next year, you’ll see that Cisco has a forward price-to-earnings ratio of just 15.2 times—not a high number by any means. (Source: “Cisco Systems, Inc. (CSCO),” Yahoo! Finance, last accessed March 1, 2019.)

With a rock-solid business, great growth prospects, and a relatively cheap valuation, Cisco stock could be a big winner in 2019 and beyond.