Is Cisco Stock A Buy Amid Debate Over Acquisitions, Capital Returns?

The outlook for Cisco (CSCO) stock is positive, as the company stands to benefit from trends in cloud computing, corporate networking, and telecoms amid the shift to remote work.

Blog

May 10, 2023 • 4 min read

Cisco Systems' (CSCO) technical ratings have improved, despite concerns about the U.S. economic situation and corporate IT spending. CSCO's stock is still concerned about the possibility of a large acquisition, despite expectations that shareholders will receive capital returns.

Cisco stock formed a new foundation on the technical chart as of April 7. CSCO's relative strength line recently reached new highs.

CSCO's stock is up 7.6% by 2023, after falling nearly 25% in 2018. CSCO's stock is still popular among institutional investors because it yields a 3% dividend.

In 2023, the maker of computer network gear has been able increase backlog fulfillment. Last year, it struggled with supply-chain issues.

CSCO's stock, like that of its rival Arista Networks(ANET), could benefit from the growing use of artificial intelligence software in the long term. AI workloads demand increased computing resources, and network bandwidth.

Cisco's stock outlook is influenced by trends in spending for corporate and telecom networks, as well as cloud computing infrastructure. Cisco has $29 billion of cash in its balance sheet after reducing buybacks for 2021 and 2022.

Acquisitions are more difficult with rising interest rates. Analysts say Cisco could still pull off a deal between $4 billion and $5 billion in the near future.

Evercore ISI analyst Amit Dharanani said that the lack of consistent capital allocation and buybacks was a key factor in investor resistance to CSCO's stock.

He continued: "Fundamentally M&A is still an underappreciated tool at CSCO's fingertips to accelerate the business transformation. Cisco's liquidity is a strong asset that can be used to make a deal or deals of great significance, if the opportunity presents itself. CSCO is looking for assets that can fill a product/market void and/or establish a stronger foothold on emerging growth areas like security or network analysis, while contributing towards the overall revenue profile.

Cisco was a leading supplier of hardware for building internet networks from 1990 to early 2000. This included both telecom companies and large corporations outside this sector. Cisco stock rose more than 100,000% during that time, just before the burst of the dot.com boom.

The tech giant wants to shift its focus from selling routers and switches, which is the core of its business, to subscription-based services and software. Cisco continues to dominate the market for corporate campus networking.

Analysts who are bullish on CSCO expect the company will gain market share against Arista in the cloud giant market. Arista beat Cisco in the cloud data center market by grabbing Microsoft's (MSFT), Facebook's (FB) and Amazon.com's (AMZN).

In the wake of the coronavirus outbreak, spending by corporations on data networks decreased as office vacancy rates increased. Some people believe that corporate networks are less important as remote work becomes more common.

Cisco's stock must therefore increase its investments in the next-generation enterprise network. The company wants to help its corporate customers create hybrid network architectures that combine on-premise data centres and cloud computing infrastructure.

Cisco wants to compete with Microsoft Zoom Video Communications and its Webex platform. Recently, it acquired Socio labs to enhance Webex events. Cisco is also working on holographic communication.

Sales of Catalyst switchs have been a bright spot for CSCO's stock. Cisco has a lot of potential in the data center upgrade market.

Data centers the size of warehouses make up what is called "the Internet cloud". These data centers are crammed with racks full of servers, storage systems, and networking equipment. Cloud computing data centers use communications equipment that can handle 100 gigabits per second.

The upgrade of data centers to 400G technology is delayed.

Analysts also say Cisco is well-positioned to benefit from the shift in corporate buyers' preferences towards software-defined wide area networking (SD-WAN). This technology uses bandwidth from the public internet. SD-WAN allows companies to reduce their reliance on expensive private data networks leased by telecom companies.

CSCO's stock has not yet been able to benefit from the build-out 5G wireless networks. Cisco has partnered up with Dish Network to offer 5G services to large businesses.

Cisco beat estimates by 88 cents on $13.6 billion in revenue and surpassed the 85 cents expected.

It expects a sales increase of 11-13% for the current quarter ending April and an EPS between 96-98 cents. Analysts estimated an EPS of 89 cents for the period ending April.

The management raised its fiscal-year profit projection to $3.73 per share from $3.78.

Cisco's growth in revenue has been largely due to acquisitions. Analysts expect Cisco's profit margins to increase in the future as the company generates more revenue from software.

Cisco agreed in late 2019 to purchase U.K. based IMImobile which sells cloud communication software in a $730 million deal.

Cisco acquired ThousandEyes in May 2020 for approximately $1 billion.

Cisco purchased AppDynamics in 2017 for $3.7 billion. In late 2017, Cisco acquired BroadSoft for $1.9billion.

Cisco purchased Duo Security in July 2019 for $2.35 billion. This is its largest cybersecurity acquisition since it acquired Sourcefire back in 2013. Cisco's acquisition of Duo Security strengthened its position in the emerging category of zero-trust cybersecurity.

Cisco has agreed to purchase Acacia Communications in 2019 for $2.6 billion cash. China's government delayed the approval of this deal. Cisco increased its offer to Acacia in January 2021 from $4.5 billion. The deal was finally finalized by the end of January 2021.

Cisco's stock reached new highs in 2019 after its breakout in October 2017. This was the first time since late 2000, during the dot-com boom.

Cisco's stock rose 41% by 2021.

CSCO's stock broke through a double bottom base in a bullish move late last year. Double-bottom chart patterns look like the letter W and feature two distinct selloffs. CSCO's stock reached a high of 64.28 in 2021 after forming a double-base chart pattern.

CSCO's technical ratings have improved. The shares currently have a Relative strength rating of 84, out of the maximum 99. The best stocks have a RS rating above 80.

Cisco's stock has an IBD Composite rating of 88, out of 99 possible points. This is according to IBD Stock Checkup. The best growth stocks are those with a Composite rating of 90 or higher.

The rating is based on the price and volume fluctuations in a stock during the last 13 weeks.

Cisco's stock has an entry level of 51.84 as of April 7. It is trading about 1% under the entry point.

Reinhardt Krause is on Twitter @URL. Follow him for the latest updates on 5G wireless technology, artificial intelligence and cybersecurity.