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Monday, 12/30/2019 4:09:39 PM

Monday, December 30, 2019 4:09:39 PM

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Is Cisco Stock A Buy Or Sell Right Now? Here's What Earnings, Charts Show
By: Investor's Business Daily | December 30, 2019

In its glory days from a 1990 initial public offering through early 2000, Cisco Systems (CSCO) thrived as a major supplier of the hardware to build internet networks, both to telecom firms and large companies outside that sector. Cisco stock soared more than 100,000% in that period, before the dot.com bubble burst.

More recently, after a breakout in October 2017, Cisco stock gained 70% through mid-July 2019. But Cisco stock swooned in the latter half of 2019.

The tech industry icon is shifting away from its core business of selling network switches and routers. With acquisitions, Cisco aims to increase revenue from software and services.

Management has stated that 30% of all revenue will come from software in fiscal 2020, up from 22% in 2017.

An increasing mix of recurring revenue is key to the strategy. In its fiscal fourth quarter, Cisco subscriptions accounted for 70% of all software revenue, up from 58% a year earlier.

Cisco stock bulls say the gear maker will get a boost as 5G wireless networks are built. However, Cisco stock guidance largely depends on corporate spending on information technology. Budgets could tighten if the global economy slows.

Cisco stock has corrected 18% since mid-July. Barclays analyst Tim Long upgraded Cisco stock to overweight on Dec. 19.

"We are more constructive on CSCO stock following the lowered valuation and new product announcements," Long said in a report to clients. "We see some fundamental shifts, and the stock has typically done well after guidance corrections."

Cisco Stock Fundamental Analysis: Will Revenue Keep Growing?

From the first quarter of 2016 through the end of 2017, Cisco revenue was flat or fell. Revenue began growing again, albeit in low single digits, starting in early 2018. The inflection put Cisco stock in rally mode.

Some of Cisco's revenue growth has come from acquisitions. In 2017, Cisco acquired software maker AppDynamics for $3.7 billion. It bought BroadSoft for $1.9 billion in late 2017.

Most of Cisco's recent acquisitions have been software related. In July, Cisco acquired Duo Security for $2.35 billion, marking its biggest cybersecurity acquisition since its purchase of Sourcefire in 2013. Acquiring Duo Security bolstered Cisco in an emerging category called zero trust cybersecurity.

Aside from acquisitions, new accounting rules have been a plus for revenue recognition. The rules known as ASC 606 require upfront recognition of multiyear software licenses.

A Catalyst For Growth But Weak Guidance

As companies shift business workloads to cloud computing services like Amazon Web Services, part of Amazon.com (AMZN), they could spend less on internal computer networks. In addition, Cisco has lost share in several large markets, though it aims to rebound in cybersecurity.

One bright spot: Catalyst 9000 computer network switches are fueling sales growth. Cisco's chief executive says the company's Catalyst 9000 upgrade cycle is "in the early innings."

However, Cisco on Aug. 14 issued weaker-than-expected revenue guidance for its first quarter of 2020. Management pointed to tighter tech budgets, softening demand from telecom customers, and a decline in Chinese orders amid the U.S.-China trade war. China accounts for only 3% of Cisco revenue, though.

Meanwhile, recent Cisco earnings growth in the midteens owes much to Trump administration tax changes.

In early 2018, Cisco brought back $67 billion in overseas cash. A new tax law allowed U.S. companies to bring back cash at a lower tax rate. Cisco used $25 billion to buy back its own stock, a move improving earnings. It also hiked dividends.

Roughly $9 billion of the buyback authorization was left at the start of 2019. Cisco in February then upped its share buyback by $15 billion. Oppenheimer in an Aug. 1 note to clients said "aggressive buyback activity is likely to decelerate in the quarters ahead."

Cisco Stock Technical Analysis

After its October 2017 breakout, Cisco stock this year touched new highs not seen since late 2000 during the dot.com boom.

Cisco stock broke out of a cup-with-handle base in mid-February with a 47.69 buy point. By early April, the stock had gained 20%, offering an opportunity to take profits.

At the time, though, Cisco stock bulls could still point to the relative strength line hitting its highest level in more than eight years.

Cisco stock hit a 19-year high of 58.26 on July 17. However, shares in Cisco pulled back ahead of fiscal fourth-quarter earnings, and fell below their 50-day moving average.

Cisco stock plunged Aug. 15 on weaker-than-expected fiscal 2020 first quarter revenue guidance.

According to Raymond James analyst Simon Leopold, the dividend-paying Cisco stock "spits out cash like an ATM." Cisco stock pays a 3% dividend. So Cisco stock could be attractive in a low-interest rate environment as bond yields fall, like other stocks attractive to the income investor.

It's also one of many big-cap technology stocks to mull.

Could 5G Wireless Boost Cisco?

Wireless phone companies are in the early stages of building out fifth generation, or "5G" networks. Cisco is one of many companies, including semiconductor companies, that have a stake in how fast the 5G wireless market takes off.

Many analysts contend that current 4G networks will still be the primary way to whisk video to smartphone users for the near future.

However, the future of 5G technology as well as edge computing lies in the Internet of Things, autonomous vehicles, drones, remote health care and augmented reality phone apps.

AT&T (T) and Verizon Communications (VZ), for example, both see a revenue opportunity in providing private 5G services to businesses.

One view, though, is that spending on 5G "core" network technology won't pick up until late 2020 or 2021.

Another opportunity for Cisco lies in data center upgrades. The so-called "internet cloud" is made up of warehouse-sized data centers.

They're packed with racks of computer servers, data storage systems and networking gear. Most cloud computing data centers now use 100 gigabit-per-second communications gear...

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