Talking Stocks: Is Cisco Systems Inc. a Buy?
Updated: Feb 3, 2020
Knowingly or not, you’re likely to have purchased Cisco products and services multiple times over the course of your life: they’re the one company you always used but never knew how much you actually needed them.
With their extensive cash reserves, growing share of the telecommunications market, as well as strong dividends, this business ticks all the boxes from the investor's perspective. Moreover, they also provide a range of services for the everyday consumer: and to make billions, you have to impact billions.
However, with the rising competition in the tech industry as well as the move towards more advanced WiFi and tech-consultancy services, how would Cisco’s stock fare in the near future?
Without further ado, let’s explore Cisco’s fundamentals against the notion of the aforementioned threats:
1. Strong Cash Reserves (Top 10)
Unbeknownst to most, Cisco Systems Inc hold the 9th largest amount of cash amongst all companies worldwide: a whopping $71.8 billion to cover their liabilities and facilitate further growth: in particular, innovation plans such as:
a) AI Network Analytics
In an economy that’s becoming powered by the advent of artificial intelligence, Cisco are in the optimal position to leverage this movement and catapult their product range to a new level. One of these endeavors includes an AI-based analytics service, which will be provided to institutional clients that aim to streamline data from their subscribers and therefore broaden the scope of information that companies can now generate about their target customers.
This will be able to impact millions of customers, and if it’s priced at a reasonable level compared to Cisco’s competitors, this could be an extremely significant source of future revenue.
Data derivation from consumers is a crucially advantageous service for businesses, and with Cisco’s innovation, it’s one that can now be provided legally and utilized by millions of companies worldwide.
b) High-Speed Cloud Sharing
While some of these terms such as "cloud", "Wide Area Networks" and "Machine Learning" may not mean much to those of use who refrain from tech talk, they certainly translate to billions of dollars in revenue for companies such as Cisco.
Cisco plans to unveil an extremely relevant service that allows their customers to share copious amounts of data with each other as well as external entities: providing them with the opportunity to pervade their resources in a manner far more advanced than any other telecom company out there.
This unique selling point gives Cisco the stability that investor’s look for, as here, we’re seeing an established company that still strives towards innovation, growth, and gaining market share.
c) Ability to Pay Dividends
The fact that Cisco hold such a pristine level of cash reserves gives them the ability to also tend to shareholder value as well as customers: and this is done through dividends.
For decades now, Cisco have been rewarding shareholders with a relatively favorable dividend payout each quarter. Regarding us teenagers with slightly less capital, the dividend may not contribute much, but it’s still a reliable source of passive income, as described below:
Example 1: Dividend Payout from Cisco with $1000
A $1000 investment into Cisco a year ago would’ve let you obtain 24 shares of Cisco at $40.20 per share.
Cisco pay out a dividend of $1.40 per share every year, which means that an investment of $1000 would yield $33.60 as a payout each year: i.e. pure passive income given to you for FREE, just for owning the stock.
Now, when you factor in the stock’s growth in a year of almost 15% ($40.20 per share grown to $45.91), your $1000 investment would yield a return of $175.60 in total ($142 growth in the value of the investment plus $33.60 as a dividend). This is a 17.50% return on your money within a year: an extremely favorable outcome with relatively lower risk, as Cisco’s prominence and strong cash reserves slightly diminish the general risks of owning equities.
Key Point: Cisco actually suffered a large downfall this year, as they forecasted that their growth would slow down due to macroeconomic triggers. This is a key tactic in public statements, whereby businesses influence investors to under-expect their earnings, and therefore allows Cisco to substantially over-perform once the earnings are out. Here, if you actually sold off your position at the high of $58 in July, you would’ve profited 39.8% on your investment alone, along with a dividend payout of $16.80 (because if you sold in July, you would only receive two quarterly payments), bringing a total profit of $414.80: a 41% return on your investment!
2. Market Growth (Shift and introduction towards 5G)
Alongside Cisco’s established position, the market that they are in is one that perpetually seeks the new big thing: in this case, it’s 5G.
Being the telecom giant that they are, Cisco attain the resources to provide a pervasive range of 5G services to vendors, and this is displayed in their new product “5G Now”. This is significant because the 5G market is forecasted to be valued at over $47 billion dollars by 2027, nearly 50 times its value today (947 million), so the fact that Cisco are stepping in early and providing a convenient service (that multiple customers can use) is a gateway towards establishing a greater brand presence as well as further revenues.
Figure 1: 5G Market Valuation
Specifically, company executives forecast that dominating the 5G market would bring in over $3 billion in Cisco revenues by 2021, which is a strong foundational start to the advent of the 5G market.
Key Point: While the market growing is positive news for Cisco, the aforementioned phenomenon also brings in a new threat: competitors. A myriad of businesses, especially in China, are seeing the potential in the TMT (Tech, Media, and Telecom) markets and are therefore starting up new businesses each day. This could provide short term disadvantages to Cisco, but the fact that this TMT giant is established and sustainable gives them an edge over the young and ambitious competitors from China and elsewhere, as these businesses are likely to be debt-heavy and cashflow negative in the foreseeable future (due to expensive R&D and operations in the tech sector).
3. Earnings Growth Stability
Despite being an established corporation, Cisco have still sustained their impressive growth rates over the years, as depicted by the diagram below.
Figure 2: Cisco Systems Revenue Growth Over Time
Source: (Statista, 2019)
While the aforementioned results don’t show accelerated growth rates, here we see a reliable company that’s able to retain its revenues over the course of decades. This articulates the low-risk nature of Cisco, as its cash reserves and consistent revenue figures suggest that it offers sustainable operations that can be powered into the long-term: something that many new tech companies fail to do.
Therefore, this allows the investor to benefit from the growth in value of the stock as well as the dividend payout, but all at a comparatively lower risk level. Whether you’re a defensive or aggressive investor, that’s an optimal way to make passive income from the comfort of your home.
The significant cash reserves being held by Cisco allow them to sustain their operations as well as invest smartly into new innovations. This allows them to uphold their established presence in the TMT market and also leverage new trends to create even more profitability: a key reason to further look into the prospect of Cisco as an investment.
The TMT market is perhaps the most rapidly growing and dynamic environment in the investing world, with new products being launched each year. The fact that this market is everlastingly growing gives companies with large resources the opportunity to ride the trend early and provide great yet affordable products to consumers: and Cisco is certainly a company that encompasses “large resources”.
Lastly, we’ve seen consistent revenues from Cisco in the last decade or so, which allows us to build an opinion of reliability around this business. While we may pursue more aggressive investments in our portfolio, it seems beneficial to hold a dividend-paying stock that holds potential for further growth: all at a relatively lower risk than most equities.
While Cisco provides less opportunity for rapid growth and quick returns, it’s a feasible company to use as a balance against more aggressive investments. As a young adult, most portfolios will be filled with growth-stocks that pose high return potential in a short amount of time: a fantastic idea, especially in youth, but it’s still beneficial to have the “finesse” aspect of a stock like Cisco alongside the ruggedness of rapidly dynamic companies.
Therefore, we’d recommend looking into Cisco further if readers seek a reliable stream of passive income along with their high-risk, high-return stock picks!