Cisco Systems, Inc. (CSCO) designs, manufactures and sells internet protocol-based networking products and services related to the communications and information technology industry worldwide. The company has a solid market share in enterprise routers, ethernet switches, and service provider routers. CSCO has a strategic alliance with Internet2 to deliver next-generation capabilities and software solutions.

CSCO is a slow-moving technology titan that is falling behind because of its underperforming hardware segment. The company is scheduled to report its fiscal first-quarter earnings on November 12th. For the fourth quarter ended July 2020, CSCO’s top-line declined 9.5% year-over-year to $12.15 million, as product revenue plunged 13% and service revenue remained flat compared to the year-ago quarter. Non-GAAP EPS for the quarter came in at $0.8, declining 4% year-over-year.

Amid the coronavirus crisis, corporates have pulled back on hardware data network spending. Consequently, the stock has lost 19% year-to-date. The declining consumer demand and the potential downside based on several factors have made our proprietary system to rate CSCO as a “Sell.”

Here is how our proprietary POWR Ratings system evaluates CSCO:

Trade Grade: F

CSCO is currently trading lower than its 50-day and 200-day moving averages of $39.13 and $42.68, respectively, indicating that the stock is in a downtrend. The stock’s 20.6% loss over the past three months reflects a short-term bearishness.

Remote work culture has affected the corporate networking hardware demand. CSCO has been adversely affected by the exponential rise in Zoom Video Communications (ZM) at the expense of its WebEx application. The company lagged to upgrade its video conferencing platform and is currently trailing to match up to ZM’s free version.

Moreover, CSCO has recently been penalized and paid $1.9 billion to Centripetal Networks, Inc. for patent infringement. The company infringed four of the five patents held by Centripetal. At issue, there were patents on network security features that CSCO has used in nine of its products between June 2017 and June 2020.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, CSCO is positioned unfavorably. The stock is currently trading 25.4% below its 52-week high of $50.28.

Looking at the past year, the stock has lost 20.5% due to its weak financials and changing business nature. CSCO’s revenue has stagnated over the past five years. While the company is shifting revenue from expensive networking gear to software subscriptions, the top-line has remained fairly the same in 2020 as it was in 2016. However, CSCO persisted to be a great dividend stock, with a four-year average dividend of 3.10%.

CSCO has made a series of acquisitions over the past few years and much of its revenue was contributed by the acquisitions rather than its core business. The company has announced nearly 33 acquisitions since 2016. The most recent is BabbleLabs, bought to improve its videoconferencing experience and enhance speech technology to compete against ZM.

Peer Grade: D

CSCO is currently rated #33 out of 53 stocks in the Technology – Communication/Networking industry. Other popular stocks in the group are Bandwidth Inc. (BAND), Ubiquiti, Inc. (UI), and Acacia Communications, Inc. (ACIA).

All of these industry participants have comfortably beaten CSCO’s year-to-date gain. BAND, UI, and ACIA have gained 155.2%, 30.5%, and 0.9%, respectively, over this period.

Industry Rank: C

The StockNews.com Technology – Communication/Networking Stocks group is ranked #58 out of the 123 industries. The companies in this industry manufacture equipment used to transmit data across communications networks. Demand is driven by economic growth as enterprises and service providers expand networks to meet increasing user needs. However, the industry is getting crowded and is suffering due to the convergence in the network, despite the extreme internet demand amid the pandemic.

Overall POWR Rating: D (Sell)

Overall, CSCO is rated a “Sell” due to weak demand amid strong competition, declining core business, short-and-long-term bearishness, and weak price momentum, as determined by the four components of our overall POWR Rating.

Bottom Line

CSCO aims to increase recurring revenue from subscription-based software and services and shift away from its core business of selling network switches and routers. However, the strategy is presently not a success. The stock’s low price makes it attractive by traditional valuation metrics, but the pertinent issue for CSCO is its revenue growth, which was a challenge even before the pandemic. However, the management hopes to gain traction with the upcoming 5G boom.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is not favorable for CSCO. The company is unlikely to reverse its revenue decline in the near term. Analysts expect revenues for its first quarter ended October 2020 to fall 10% year-over-year. The consensus EPS estimate for the quarter indicates a 16.7% decline from the year-ago value.

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CSCO shares were trading at $38.75 per share on Monday morning, up $1.22 (+3.25%). Year-to-date, CSCO has declined -16.43%, versus a 13.19% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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