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Better Buy: Cisco Systems, Inc. vs. Oracle Corporation

A visualization of wireless connections.

Cisco (NASDAQ: CSCO) and Oracle (NYSE: ORCL) are often considered slow growth tech stocks. But over the past 12 months, shares of Cisco and Oracle rallied 33% and 24%, respectively, easily outperforming the S&P 500's 17% gain. Do these two tech stalwarts still have room to run? Let's take a closer look at both companies to find out.

What do Cisco and Oracle do?

Cisco controls 53% of the ethernet switching market and 37% of the enterprise and service provider router market according to IDC's fourth-quarter numbers. However, Cisco's market share in both markets has been shrinking due to intense competition from Huawei , Hewlett-Packard Enterprise , Arista Networks , and Juniper Networks .

A visualization of wireless connections.

Image source: Getty Images.

To diversify away from switches and routers, Cisco expanded its security, wireless, and collaboration software businesses. The growth of these businesses, especially security solutions, offset softer sales of its switches and routers.

Oracle mainly sells database hardware and software to enterprise customers. Those are slow growth businesses, since most companies that need large-scale database solutions have already deployed them.

To offset its ongoing slowdown in software license and hardware revenues, Oracle is pivoting from on-premise solutions toward cloud-based services -- which it splits into SaaS (software as a service) and PaaS/IaaS (platform/infrastructure as a service) solutions. Cloud services generate more sustainable subscription-based revenues, while making it easier for Oracle to upsell new services.

How fast are Cisco and Oracle growing?

Cisco's total revenues rose 3% annually to $11.9 billion during the second quarter. Its Infrastructure Platforms (routers and switches) revenue, which accounted for 56% of its top line, rose 2% during that period. Its Applications and Security product revenues both rose 6% annually, but those two businesses only accounted for 15% of Cisco's revenues.

Revenue from its Services, which accounted for 27% of its top line, rose 3% annually -- indicating that Cisco was successfully pivoting from hardware toward higher-growth services. Analysts expect Cisco's revenue and earnings to rise 2% and 8%, respectively, for the full year.

Servers in a data center.

Image source: Oracle.

Oracle's revenue rose 6% annually to $9.6 billion during the second quarter . Its cloud revenues grew 44% to $1.5 billion. Within that total, its SaaS revenue rose 55% to $1.1 billion, fueled by robust demand for its Fusion Cloud enterprise services. Its PaaS/IaaS revenues grew 21% to $396 million.

However, Oracle's legacy businesses remain weak. Its software licensing revenues stayed flat year-over-year, software license updates and product support revenues rose 4%, on-premise software revenues rose 3%, hardware revenues fell 7%, and service revenues inched up just 1%.

Nonetheless, Wall Street still expects Oracle's strengths to outweigh its weakness, with 5% sales growth and 7% earnings growth this year.

Overseas cash could be game-changer

Cisco and Oracle are both well-poised to benefit from recent tax rate reductions on repatriated cash. Cisco is bringing home $67 billion in overseas earnings, with $44 billion already earmarked for buybacks and dividends. The rest could potentially be spent on domestic acquisitions.

Oracle is sitting on nearly $70 billion in overseas cash and equivalents, and it will likely follow Cisco's lead and repatriate a large percentage of that cash. During the Web Summit technology conference last November, co-CEO Mark Hurd stated that the "opportunity to bring our cash back to the US and invest it is certainly very attractive".

The valuations and dividends

Cisco currently trades at 18 times forward earnings, while Oracle has a forward P/E of 17. Cisco pays a forward dividend yield of 2.6%, which is higher than Oracle's forward yield of 1.4%.

However, investors should be aware that Cisco and Oracle could significantly lower their multiples with buybacks and increase their dividend yields after repatriating their overseas cash. This could make both stocks much more attractive to value-seeking income investors.

The winner: Cisco

Cisco and Oracle are both mature tech stocks approaching turning points in their businesses. I think both stocks are solid investments -- but if I had to pick one over the other, I'd stick with Cisco, because it pays a higher dividend and has clearer plans for its repatriated cash.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool owns shares of Oracle and has the following options: short June 2018 $52 calls on Oracle and long January 2020 $30 calls on Oracle. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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