Cisco Stock is an Overlooked Value Play

Cisco Stock is an Overlooked Value Play

It may seem like every tech stock soared in 2020, but Cisco (NASDAQ: CSCO) shares actually fell 7% for the year. The networking infrastructure company recently came out with its Q2 2021 earnings. Revenue dipped 0.4% yoy, marking the fifth consecutive quarter of declining revenue. Leading up to the earnings report, Cisco shares had performed well in 2021 YTD. But since the report, shares have endured a sharp pullback. CSCO is now nearing breakeven for 2021.

Many companies have shifted their spending away from corporate data centers and towards cloud computing since the onset of the pandemic. But post-pandemic, people will go back to the office – in some capacity – and companies will start spending on data centers again.

Infrastructure Platforms Business Had Bright Spots in Q2

Cisco’s infrastructure platforms business generated 53% of its second-quarter revenue. As a whole, the segment’s revenue fell 3% yoy. But sales increased for the company’s Nexus 9K data center switches, Catalyst 9K switches, and Wi-Fi 6 wireless products.The pockets of strength in the infrastructure platforms business help keep Cisco’s revenue declines on the low-end for as long as the pandemic lasts. Post-pandemic, those switches and products could lead the way to growth.

Security Business is Growing

Cisco’s security business accounts for just 7% of its overall revenue, but the segment’s revenue grew by 10% yoy in the second quarter.



This segment isn’t making much of a difference in Cisco’s top-line at the moment, but it would be a mistake to overlook its long-term potential. The demand for cloud-based security solutions should continue to increase for many years to come. If this segment grew at a double-digit CAGR over the next 5+ years, it would be a company-wide game-changer.

That may or may not happen. If it doesn’t, Cisco will be just fine. But if it does, Cisco could get a nice boost.

Gross Margins Improved in the Second Quarter

Cisco’s gross margins were excellent across the board in the second quarter:

  • Total gross margin of 66.9% was up 50 basis points yoy.
  • Product gross margin of 66.6% was up 70 basis points yoy.
  • Service gross margin of 67.9% was up 20 basis points yoy.

Cisco attributed the gross margin growth to a “positive product mix, including some software benefit and productivity improvements, partially offset by pricing.”

Management is Cautiously Optimistic

Cisco CEO Chuck Robbins had this to say on the Q2 earnings call:

“Looking ahead, we are cautiously optimistic as recent surveys of IT spending indicate yoy IT budget growth for calendar 2021. And Cisco remains well-positioned among CIO's top forward-looking spending priorities, including network infrastructure, cybersecurity software, as well as cloud migration and cloud infrastructure.”

Robbins added that he’s aware of the uncertainty of the pandemic and how it could influence the market.

And that’s the thing: a strong Cisco recovery won’t happen until the pandemic ends. But there is a good chance we return to normal in the second half of 2021, so Cisco could see growth in the first half of its fiscal 2022. With the company facing easy comps from the last five quarters, Cisco could post impressive numbers.

The Price is Right

Cisco is trading at just 14.2x forward earnings. There is outstanding value here because Cisco’s sales look to be at a cyclical low; most companies that are trading at a multiple of 13-15x forward earnings these days are expected to see earnings shrink for years to come.

On top of that, Cisco gives you a 3.18% dividend yield. The company has consistently increased its quarterly dividend over the last 10 years; it was 6 cents per share in 2011 and now stands at 37 cents per share. The payout ratio of a shade over 60% shows that Cisco should have no problem continuing to increase its payout.

How Should You Play Cisco?

It’s hard to see Cisco shares going much lower – the value is too good. You may, however, be tempted to wait to buy until a full reopening of the country seems imminent.

But the market is a forward-looking mechanism and investors could choose to bid up Cisco shares if a reopening appears to be imminent.

For that reason, you may want to pick up CSCO shares sooner rather than later.

Companies in This Article:

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Cisco Systems (CSCO)$55.23flat2.68%22.92Buy$52.59