Tech industry icon Cisco Systems (CSCO) pulled the trigger on a major acquisition in September. It agreed to buy software company Splunk (SPLK) for $28 billion in cash. The big question: is the deal “transformative” for CSCO stock?
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Meanwhile, the Splunk deal is expected to close by the summer of 2024.
Shares in Cisco fell after the computer networking giant reported fiscal second-quarter earnings and revenue that fell from a year earlier but topped consensus estimates as product orders fell again. The company’s guidance for CSCO stock in the current April-ending quarter missed expectations.
“Cisco delivered a solid fiscal Q2 but forward guidance was lowered for the second consecutive quarter,” said Barclays analyst Tim Long in a report.
The company plans to slash 5% of its workforce, roughly 4,200 jobs, in another round of cost-cutting.
CSCO Stock: Rival HPE Makes Acquisition
Cisco stock has retreated 2% this year after advancing 6% in 2023. The Nasdaq composite advanced 43% in 2023 amid the buzz over artificial intelligence.
Meanwhile, Hewlett Packard Enterprises‘ (HPE) acquisition of Juniper (JNPR) will make HPE a stronger, more direct competitor with Cisco, analysts say.
Like rival Arista Networks (ANET), CSCO stock could get a long-range boost from growing usage of artificial intelligence software. AI workloads processed in cloud data centers require increased computing resources and networking bandwidth.
With a 3% dividend yield, Cisco stock still finds support among institutional investors.
The outlook for CSCO stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks. July-quarter earnings topped estimates while the company’s revenue outlook for fiscal 2024 came in below views.
Cisco aims to increase recurring revenue from subscription-based software and services and shift away from its core business of selling network switches and routers.
With roots in data analytics software, Splunk has expanded into cybersecurity. In addition, it’s undergoing a transition to a software-as-a-service business model from on-premise products.
Cisco Stock: Capital Returns Safe?
In a report to clients, Evercore ISI analyst Amit Daryanani noted how bulls and bears on Cisco stock view the Splunk deal.
Bulls on CSCO stock believe the deal “expands Cisco’s presence into the security market and enables them to be an end-to-end solution provider especially as customers look to shift towards platform centric solutions,” Daryanani said. He added that bears on Cisco stock point to the deal’s rationale.
“The concern is that the deal is centered around (near-term) financial benefits — better margins/accretion vs. long-term strategic benefits — as in does it structurally change CSCO from being a share donor to share gainer in security?” he said.
Cisco management says the Splunk deal will not impact capital returns to shareholders.
CSCO Stock: Shift To Software
From a 1990 initial public offering through early 2000, Cisco thrived as a major supplier of the hardware to build internet networks, both to telecom firms and large companies outside that sector. Cisco stock soared more than 100,000% in that period, before the dot.com bubble burst.
Cisco remains dominant in the corporate campus networking market.
At the end of April, Cisco had $23.3 billion in cash and equivalents plus short-term investments on its balance sheet. That gives it ample resources for a big acquisition if the opportunity arises.
Analysts with a bullish view of CSCO stock expect the company to gain share in the cloud titan market vs. Arista Networks. It beat Cisco to market in cloud data centers by grabbing Microsoft (MSFT), Facebook (FB) and Amazon.com (AMZN) as customers.
During the coronavirus pandemic, corporate spending on data networks slowed amid increased office vacancy rates. One view is that corporate networks will be less important if remote work becomes entrenched.
As a result, Cisco stock needs to hike investments in next-generation enterprise networks. The company aims to help corporate customers build hybrid network architectures that utilize on-premise data centers and cloud-computing infrastructure.
Cisco aims to build up its Webex video conferencing platform versus Microsoft and Zoom Video Communications (ZM). It recently acquired Socio Labs to boost Webex events. Long range, Cisco is working on holographic communications.
Cisco Stock: Fundamental Analysis
The maker of computer networking gear has been able to ramp up backlog fulfillment after it struggled with supply chain issues last year.
One bright spot for CSCO stock has been sales of the Catalyst 9000 switches. Also, there’s opportunity for Cisco in data center upgrades.
The so-called “internet cloud” is made up of warehouse-sized data centers. They’re packed with racks of computer servers, data storage systems and networking gear. Most cloud computing data centers now use 100 gigabit-per-second communications gear.
Meanwhile, a data center upgrade cycle to 400G technology has been delayed.
Also, analysts say Cisco is also well-positioned as corporate buyers shift to networking technology called software-defined wide-area networking, or SD-WAN. The technology often taps bandwidth on the public internet. With SD-WAN, companies have less need for costly private data networks leased from telecom companies.
The build-out of 5G wireless networks has yet to emerge as a growth driver for CSCO stock. Cisco has partnered with Dish Network (DISH) to sell 5G business services to large companies.
Cisco’s Growth Through Acquisitions
Much of Cisco’s revenue growth has come from acquisitions.
Cisco in late 2019 agreed to buy U.K.-based IMImobile, which sells cloud communications software, in a deal valued at $730 million.
In May 2020, Cisco acquired ThousandEyes, a networking intelligence company, for about $1 billion.
In 2017, Cisco acquired software maker AppDynamics for $3.7 billion. It bought BroadSoft for $1.9 billion in late 2017.
In July 2019, Cisco acquired Duo Security for $2.35 billion, marking its biggest cybersecurity acquisition since its purchase of Sourcefire in 2013. Acquiring Duo Security bolstered Cisco in an emerging category called zero trust cybersecurity.
Cisco in 2019 agreed to buy Acacia Communications for $2.6 billion in cash. China’s government delayed approval of the deal. In January 2021, Cisco upped its offer for Acacia to $4.5 billion and the deal finally closed.
Cisco Stock Fundamentals
Cisco fiscal Q2 earnings fell 1% from a year earlier to 87 cents on an adjusted basis. Revenue fell 6% to $12.8 billion.
Analysts estimated that Cisco would earn 84 cents on revenue of $12.71 billion, according to FactSet.
For the April quarter of fiscal 2024, Cisco forecasts earnings of 85 cents at the midpoint of guidance vs. analyst estimates of 92 cents.
In addition, Cisco says it expects sales of $12.2 billion at the midpoint of its outlook. Analysts predicted that sales will fall 3.7% to $13.09 billion.
Cisco Stock: Is It A Buy Now?
In the long run, Cisco stock analysts expect the company’s margins to improve as more revenue comes from software products.
CSCO stock currently holds a Relative Strength Rating of 30 out of a best-possible 99. The best stocks tend to have an RS rating of 80 or better.
Meanwhile, Cisco stock also owns an IBD Composite Rating of 66 out of a best-possible 99, according to IBD Stock Checkup. The best growth stocks have a Composite Rating of 90 or better.
Shares have an Accumulation/Distribution Rating of B-minus, according to IBD MarketSmith analysis. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
CSCO stock trades well below its 50-day moving average.
As of March 11, Cisco stock holds an entry point of 50.58. It trades well below the entry point.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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