Shares of Cisco Systems Inc. (CSCO, Financial) are up nearly 40% since Dec. 24, nearly in tandem with the bull run in the U.S. stock market. Yet, it would be myopic to suggest that given the company’s rally, it has already run its course.
Far from it. Cisco appears to have much room to run in the coming quarters as it continues to diversify by expanding from hardware and infrastructure products into software and services.
Cisco Systems' infrastructure business continues to lay the foundation that allows it to easily expand to new markets and introduce new products. Its switches, routers and other infrastructure products continue to be its biggest revenue drivers, but the software and services unit is catching up quickly.
In the most recent quarter ended in January 2019, Cisco’s main revenue driver contributed 57% of the company’s revenue, representing a 6% year-over-year growth. The company’s revenue of $12.4 beat expectations, rising 7%, while non-GAAP income was up 6% to $3.1 billion. The earnings per share of 73 cents was also above estimates.
In the software and services unit, the AppDynamics and WebEx unit produced revenue of $1.465 billion, rup 24% while the security unit was up 18% to $658 million. According to the company’s management, Cisco is beginning to reap the benefits of investing in a subscription-based revenue model, which is partly why the software and services section has experienced tremendous growth. Compared to fiscal second quarter of 2018, subscription revenues ticked up by about 10 percentage points the second quarter of 2019, to about 65% of software and services revenue.
Cisco’s expansion of its software and services business is also giving it a bigger footprint in the rapidly growing unified communications market. Through Cisco Unified Contact Center Enterprise, the company has created networking products that will help business improve their channels of communication.
And with small and medium-sized businesses now embracing the modern modes of business communication in a bid to reducing customer costs, call center software providers will be looking to leverage Cisco’s technologies. This could be a potential growth catalyst for the switch maker. Cisco’s Unified Contact Center should reap tremendous growth by working with third parties to offer communication solutions to businesses.
The technology giant also stands to gain massively from the official launch of 5G networking solution in 2020. Cisco is expected to continue to dominate the 5G wireless equipment market, and this provides yet another catalyst for growth.
The U.S. telecommunications giants Verizon Communications Inc. (VZ, Financial) and AT&T Inc. (T, Financial) have also made inroads by launching pilot 5G projects. In China, China Mobile Ltd. (CHL, Financial), China Telecom Corporation Ltd. (CHA, Financial) and China Unicom Ltd. (CHU, Financial) are the flag bearers. And while Huawei Telecommunications Equipment, one of Cisco System’s biggest competitors. is expected to maintain leadership in China, Cisco will claim North America and compete for leadership globally.
Cisco appears to have some impressive growth catalysts. which suggest that even given its current stock price, there is still some room for more uptrend. Analysts have a projected earnings per share of $3.62 for the fiscal year 2021, which implies a growth of about 40% or a CAGR of 12%. There is a lot to look forward to.
To conclude, Cisco has been one of the most consistent dividend-paying stocks in the technology industry over the last 10 years, with dividends paid to shareholders in each of the last nine years. And given the current yield of about 2.47%, investors will be excited by the opportunities the stock provides given its current growth trajectory.
Shares of Cisco may be on a steady climb, which could be creating an expectation of a potential slowdown in the coming quarters. But the company has some interesting growth catalysts, which could provide more impetus for the rally to continue.
Disclosure: I have no positions in the stocks mentioned.
