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Harsh Jain
Harsh Jain
Articles (203) 

Cisco Systems' Future Growth Looks Promising

Company's focus on diversifying its revenue stream will offset the decline in core business

February 16, 2017 | About:

It was a profitable year for Cisco Systems (NASDAQ:CSCO) in 2016 as the stock was up approximately 11%. On top of that, the stock is off to a great start this year, up nearly 12% year to date.

The company is mainly known for its enterprise network hardware, but it continues to expand itself and grow its other segments on the back of striking acquisitions and innovations. The company reported its second quarter results Wednesday.

In second-quarter fiscal 2017, the company shared earnings per share of 57 cents, beating the analyst estimates by 1 cent. The company’s revenue came in at $11.06 billion, surpassing the consensus by $50 million. However, that figure represents a drop of 1.7% (year over year) compared to -0.1% in the same quarter of fiscal 2016.

On the other hand, the company’s overall customer base escalated to 67,500 as it added more than 5,500 next-generation firewall clients.

In fiscal 2016, Cisco’s core business of switches and routers displayed some negative signs of growth, as router sales plunged 4% whereas sales of switches remained uniform. The main reason behind the decelerating growth is escalating competition from cheaper competitors.

These cheaper rivals are producing hardware required for software-defined networking (SDN). This will have a direct impact on the company’s core business, as SDN platforms shrink the need for hardware such as switches and routers.

However, the company is well aware of the slowdown in its core business. To take care of this, it is diversifying its revenue stream by focusing on other high growth areas such as collaboration, cybersecurity as well as service provider video solutions, which it can unite with its networking hardware.

Moving ahead, the company is also betting big on cloud computing, as it believes that more than 90% of entire data center traffic will be through cloud networks by 2020. Cisco has developed Umbrella, a cloud security platform, to enable users to gain access to the Internet anywhere, even if they are far away from an enterprise network.

It also recently launched the Smart+Connected City Platform which helps enable an open architecture that supports the integration of multiple solutions, sensors and applications. Furthermore, the company is with several partners to help enable these services as well as solutions to convey exclusive Cisco expertise in data security and scaling.

Summing up

Cisco performed well in 2016 and is off to a good start this year. The stock trades at $33.73 per share, a new 10-year high. Most importantly, the company has robust cash flow and plans to use it to buy several other companies and enhance its bottom-line via buybacks.

Currently, Cisco trades at a price-earnings (P/E) ratio of 15.63, which looks reasonable. It also offers a healthy forward dividend yield of 3.17%. As a result, shareholders should hold the stock for additional gains in the year ahead.

Disclosure: No position in the stocks mentioned in this article.

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