Cisco Stock: Classic Tech with Promising Catalysts

Shares of old-time networking equipment firm Cisco (CSCO) are fresh off a 15% pullback alongside the broader tech scene. With a 2.7% dividend yield, below-average growth prospects, and a modest 20 times trailing earnings multiple, Cisco isn’t the same exciting stock as it used to be back in the late-1990s.

Arguably, it’s a boring stock that should be able to remain standing as the new class of exciting, unprofitable, and more expensive technology stocks suffer their valuation resets.

Cisco is not a stock that investors need to worry about. It’s a very profitable company, with some promising efforts that could enhance margins and profitability prospects moving forward. Most notably, Cisco’s software pivot is something that investors could really get excited about.

As interest rates continue to rise, expect Cisco to continue marching higher, as it powers past supply-chain woes en route to an environment that will be kinder to classic value names. Further, Cisco’s software focus is not only a potential boon on operating margins, but it could also reignite growth — the perfect combination for the current market environment.

Cisco has experienced sluggish growth of late, but unlike other “classic tech” plays like IBM (IBM), I see a realistic path towards greater profitability. With that could come a higher multiple for CSCO stock, regardless of which direction unprofitable growth companies head next. I remain incredibly bullish on Cisco stock.

Demand Remains Robust

It’s easy to dismiss Cisco as boring tech, given its recent track record of flat sales growth. With rates rising and real profits mattering more than just sales, Cisco could find the market tides turned in its favor, all while management looks to capitalize on a margin-driving opportunity in software.

For the second quarter of 2022, Cisco saw a 6% increase in revenue and adjusted profit on a year-over-year basis. The need for enhanced digital infrastructure was a boon that has been offset by supply constraints. Moving ahead, management expects supply-chain challenges to persist, while demand for its offerings remains robust.

Undoubtedly, demand could remain strong well after the pandemic ends, given the pandemic may have acted as a demand accelerant rather than just a short-lived boost. Investors fearing fast-falling demand to the magnitude of a Peloton (PTON) can breathe a sigh of relief, as Cisco continues navigating through a rocky road to keep up with demand.

The “exceptional demand” is a likely sign that the digital transformation is still very much at play. The real question is can Cisco improve its ability to meet demand before potential rivals have a chance to swoop in.

Given recent management commentary, I think the bar has been set low enough such that a better-than-expected alleviation of supply constraints could lead to a pleasant surprise in a future quarter. Investors did feel good about the guide for higher sales growth moving forward, but are they still discounting the magnitude of said sales growth?

Software Focus

It’s not just the fading of COVID-induced supply-chain pressures that could propel Cisco’s top  and bottom line higher over the next year. Cisco’s push to software is really worth getting excited about. The company, best known for its networking hardware, can unlock better margins and perhaps a higher valuation multiple on its shares once software and services become a more influential mix of the firm’s total revenues.

Cisco has already seen some of the positive impacts on its margins from its software business. Margins are on the right track, and they could have more room to the upside.

Just a few weeks ago, Cisco reportedly showed interest in scooping up fallen data-analytics software firm Splunk (SPLK). A potential $20-billion buyout of Splunk could give Cisco a massive push down the path of software and services.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, CSCO stock comes in as a Moderate Buy. Out of 19 analyst ratings, there are 11 Buy recommendations and eight Hold recommendations.

The average Cisco price target is $66, implying 20% upside. Analyst price targets range from a low of $59 per share to a high of $73 per share.

Bottom Line on Cisco Stock

Cisco received plenty of analyst price target upgrades over the past week, all while the market sagged lower. 

Things are starting to look up for Cisco, so the classic tech stock may be worth watching should it move at the hands of broader market forces, rather than Cisco’s own positive developments.

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