Cisco Systems, Inc. (CSCO) and NETGEAR, Inc. (NTGR) are two popular companies in the networking industry. CSCO San Jose, Calif., designs and manufactures Internet Protocol (IP) based networking products and services related to communications and information technology worldwide. The company sells its products and services directly and through systems integrators, service providers, resellers, and distributors. In comparison, NTGR, which is also headquartered in San Jose, designs, develops, and markets networking solutions and smart connected products for consumers, businesses, and service providers. It offers network-attached storage devices, wireless controllers and access points, unified storage products, Internet protocol (IP) security cameras, and home automation devices and services. It also offers value-added services that include technical support, parental controls, and cybersecurity protection.
The surging demand for advanced, cloud-based networking products and solutions from residential, commercial, and industrial areas since the pandemic, due to the continued adoption of hybrid working models, has incentivized networking companies to deliver more efficiency in their automation, analytics, and security solutions. The recent passage of a bipartisan infrastructure bill that provides significant funding for networking and 5G companies is likely to contribute to the industry’s long-term growth. The global network infrastructure market is expected to grow at 3.9% CAGR to $229.74 billion by 2026. So, both CSCO and NTGR should benefit.
But while NTGR’s shares have declined 18.9% in price over the past year, CSCO has surged 30.6%. Also, CSCO is a clear winner with 5.4% gains versus NTGR’s negative returns in terms of their past six months’ performance. But which of these stocks is a better pick now? Let us find out.
On December 1, 2021, Datagroup, a leading Ukrainian telecom operator for business and home users, announced it is building a secure and reliable high-speed data transmission network with CSCO’s Cisco Routed Optical Networking and Converged SDN Transport architecture solutions. This architecture will help Datagroup deploy one of the most flexible, automated, and efficient networks in the Ukrainian telecom market, integrate open data models and standard APIs, and simplify the commissioning of new services. The two companies are looking forward to a long-term partnership with each other.
On November 2, NTGR introduced the first 5G Tri-band WiFi 6 Mesh System (NBK752), which is the latest addition to NTGR’s high-performance Orbi product line, which provides high-speed 5G Internet for use in homes and businesses. Because ultra-high-speed Internet is witnessing surging demand from residential and industrial areas, the new Orbi NBK752 mesh system can be used for always-on broadband, whether as a primary Internet connection or as a backup when wired Internet services fail. NTGR expects to gain widespread recognition across the industry in the near term with the product.
Recent Financial Results
For its fiscal first quarter, ended October 30, 2021, CSCO’s total revenue increased 8.1% year-over-year to $12.90 billion. The company’s non-GAAP gross profit came in at $8.32 billion, representing a 6% rise from the prior-year period. CSCO’s non-GAAP operating income was $4.29 billion, up 10% from the prior-year period. While its non-GAAP net income increased 8.2% year-over-year to $3.48 billion, its non-GAAP EPS increased 7.9% to $0.82. The company had $7.62 billion in cash and cash equivalents as of October 30, 2021.
For the fiscal third quarter, ended October 3, 2021, NTGR’s net revenue increased 30.3% year-over-year to $290.15 million. The company’s gross profit came in at $576.24 million, marking a 23.7% fall from the prior-year period. Its non-GAAP operating income was $19.49 million, representing a 52.9% year-over-year decline. And NTGR’s non-GAAP net income was $15.30 million for the quarter, indicating a 55.9% decline from the year-ago period. Its non-GAAP EPS decreased 55.8% year-over-year to $0.50. The company had $283.27 million in cash and equivalents as of October 3, 2021.
Past and Expected Financial Performance
CSCO’s revenue and levered free cash flow have increased at CAGRs of 0.4% and 3.6%, respectively, over the past three years.
Analysts expect CSCO’s EPS to increase 6.2% year-over-year in the current year and 7.9% next year. Its revenue is expected to grow 5.8% year-over-year in the current year and 5.2% next year. And the stock’s EPS is expected to grow at a 6.6% rate per annum over the next five years.
In comparison, over the past three years, NTGR’s revenue has increased at a 17.1% CAGR, and its levered free cash flow has declined at a 22.9% CAGR.
NTGR’s EPS is expected to decrease 20.8% year-over-year in the current year and 28.9% next year. The company’s revenue is expected to decline 6.4% year-over-year in the current year and 7.6% next year. However, analysts expect the stock’s EPS to grow 54.8% rate per annum over the next five years.
In terms of non-GAAP P/E, CSCO is currently trading at 16.02x, which is 45.8% higher than NTGR’s 10.99x. And in terms of forward EV/Sales, NTGR’s 0.43x compares with CSCO’s 4.13x.
CSCO’s $50.79 billion trailing-12-month revenue is 39.8 times higher than NTGR’s $1.28 billion. Also, CSCO is also more profitable, with a 31.2% EBITDA margin versus NTGR’s 8.8%.
Furthermore, CSCO’s ROE, ROA, and ROTC of 28.2%, 9.2%, and 16.4%, respectively, compare with NTGR’s 12%, 5.7%, and 8.6%.
While CSCO has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, NTGR has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
In terms of Quality, CSCO has been graded an A, consistent with its higher-than-industry profitability ratios. CSCO’s 27.7% trailing-12-month EBIT margin is 198.4% higher than the 9.3% industry average. In comparison, NTGR’s C grade for Quality reflects its slightly lower-than-industry profit margins. NTGR has a 7.6% trailing-12-month EBIT margin, which is 18.1% lower than the 9.3% industry average.
Of the 55 stocks in the C-rated Technology – Communication/Networking industry, NTGR is ranked #39, while NTGR is ranked #5.
Beyond what we have stated above, our POWR Ratings system has also rated CSCO and NTGR for Growth, Stability, Sentiment, and Momentum. Get all NTGR ratings here. Also, click here to see the additional POWR Ratings for CSCO.
With various efforts being made to address the ongoing semiconductor chip supply crisis that had negatively affected the production of various networking equipment, the passage of bipartisan infrastructure bill and the growing interest in 5G technology should enable both CSCO and NTGR to grow substantially in the long run. However, its higher profitability and favorable analyst sentiment we think make CSCO a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology – Communication/Networking industry.
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CSCO shares were trading at $56.21 per share on Wednesday afternoon, up $1.37 (+2.50%). Year-to-date, CSCO has gained 29.29%, versus a 25.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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