Cisco Systems Stock: Is Now the Time To Buy?

Cisco Systems (NASDAQ:CSCO) is like your favorite sports team, assuming you’re a real fan and don’t just follow whoever wins. It’s always wait until next year. Since its glory days during the dot-com era, when it was briefly the world’s most valuable company, CSCO stock has been regularly disappointing investors. It’s still about 35% below its year 2000 high. Last year, when everyone was go-go on technology, I even told you to dump it. 

But a decade after becoming a value stock and instituting a dividend (which now yields 2.8%), Cisco may finally be getting out of first gear. The company has bought yet another security start-up, and delivered what looked like strong earnings, with revenue up 7% and earnings up 5%.

The market’s reaction has been a yawn. They didn’t like its conservative guidance. They didn’t like its supply chain issues.  Never mind that orders were up 10%, and 17% from service providers.

CSCO Stock: Disbelief is Strong

Today Cisco is trading around $52.46 per share. That’s a market cap of $221 billion and a price to earnings ratio of 21.95. Cisco is delivering strong earnings and it’s a cheap stock.

Analysts have given reasons for its sluggish movements. The sales number has barely budged in years. Earnings growth is in the single-digits. But Cisco has been executing a strategic turn, from relying on hardware sales (which are spotty and seasonal) to relying on software subscriptions (which are steady). This is reflected in its acquisitions, 11 in just the last year.

Cisco seems to have regained its footing just as investors turn away from technology, toward retailers and other reopening plays.  There remain 17 analysts following CSCO stock, and their average price target is just 11% ahead of its current price.

The irony this time is that Cisco was hit in hardware, which it’s moving away from. The cause wasn’t a shortage of demand, but a shortage of chips, which hurt deliveries. Those shortages will likely ease in time.

Cisco Software

Meanwhile, Cisco has its fingers in most of software’s fast-growing pies.

Cisco’s WebEx conferencing software and security offerings work together to win enterprise contracts over newcomers like Zoom Video (NASDAQ:ZM). Its software run rate is up to $14 billion/year. Subscriptions now represent 81% of that total, so its $3.8 billion handle for the quarter is a floor, not a ceiling.

Cisco is poised to do big things in the Machine Internet, in point of sale software, and in video content analysis, all of them fast-growing niches.

Software is becoming a cash cow, generating $15 billion in operating cash flow each year. This makes the $1.48/share annual dividend, which costs $6.3 billion per year to service, very safe. It also means Cisco can keep making acquisitions to keep its products on the leading edge.

These are areas where scale is starting to matter. When problems are found they must be patched quickly. Cisco is patching quickly.

CSCO Stock: The Bottom Line

Cisco isn’t going to get you rich in your 60s, as it might have done in your 30s. Big numbers are hard to shift.

But the modest, software-based strategies of CEO Chuck Robbins do mean that income investors can do well with Cisco. You buy it when it looks cheap, like now, and hold it. You let speculators bid up hot sectors and, when Cisco gets a little warmer (as it will), or when value comes into favor (as it will) you stand to benefit.

Cisco is a get rich slowly stock. Which is not altogether a bad thing.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.