Shares of Cisco (CSCO) have been in a nice uptrend, rising some 27% so far this year, slightly outpacing the 24% rise in the S&P 500 index. Cisco, which pays a solid dividend yield of 2.6%, has benefited from the market’s rotation into “value” plays ahead of the economy re-opening.
What’s more, investors anticipate increased demand not only for infrastructure and networking services, but also for cloud computing and telecom networks services which has become key drivers of Cisco’s growth over the past year. The networking giant reports first quarter fiscal 2022 earnings results after the closing bell Wednesday. Investors want to know what it will take to keep Cisco stock moving higher.
While the pandemic has indeed impacted Cisco’s business as it forced enterprise and commercial customers to either delay orders or suspend projects entirely, the company remains in a strong position to benefit from rising demand for digital networks for both educational and business needs. What’s more, evidenced by recent acquisitions, Cisco continues to shift its business model more towards software and applications, particularly those services that generate high recurring revenues.
In the three months that ended October, Wall Street expects Cisco to earn 80 cents per share on revenue of $12.98 billion. This compares to the year-ago quarter when earnings came to 76 cents per share on revenue of $11.93 billion. For the full year, earnings are projected to rise 6.2% year over year to $3.42 per share, while full-year revenue of $52.87 billion would rise about 6.1% year over year.
While the company is certainly heading in the right direction in its transition towards software and applications and shifting away from its core business of selling network switches and routers, the pace of the transition hasn’t been as fast as some investors would like. The speed of Cisco’s software transformation is key to Cisco's success as it continues to realize revenue declines in its legacy hardware segments, particularly the routing and switching businesses which are cyclical in nature.
But the pace is poised to accelerate, according to statements made by management at the company's analyst day Sept. 15. The company expects subscription revenue to account for 50% of total revenue in fiscal 2025, up from 44% in fiscal 2021. What’s more, when factoring recent acquisitions, Cisco management forecasts 5% to 7% of revenuer growth through fiscal 2025, taking into account the rise in the company’s total addressable market which it expects to grow at a 13.45% annualized rate of by 2025, reaching $400 billion (up from $260 billion).
Cybersecurity has been a key growth area for Cisco, which has driven double-digit revenue growth in deferred revenue and higher levels of recurring revenue. In the fourth quarter consolidated revenues grew 8% to $13.13 billion, demonstrating broad strength, while adjusted EPS rose 5% to 84 cents, beating on both measures. During the quarter, Product revenue of $9.72 billion rose 10%, while Service revenue was up modestly at 2.6% to $3.41 billion.
The company said it saw double digit order growth across all customer markets and geographies, including product order growth of 31% which was its strongest year-over-year growth in more than ten years. It was a strong quarter for Cisco. And with the stock price still trading at a discount, combined with its strong 2.6% dividend yield, now would be the time to take a long look at Cisco for the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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