Is Cisco Stock Undervalued?

Cisco Systems, Inc. (NASDAQ:CSCO) is a 35-year-old technology company that’s a foundational part of Silicon Valley, the NASDAQ 100, Dow Jones Industrial Average, S&P 500 and S&P 100.

The company pioneered the local area network (LAN) and outlasted the dot-com bubble. Its Webex video conferencing experienced a jump alongside rival Zoom Video Communications Inc (NASDAQ:ZM).

It’s also benefiting from the backlash against its competitor Huawei, which found itself a casualty of the escalating U.S.-China trade war.

Still, Cisco is trading in the range of $40 per share, which is closer to its coronavirus crash price of $32.40 than it is of 2019 highs of $50-$60. This has some analysts wondering – is Cisco stock undervalued?

Why Cisco Stock Is Down

The company reported revenue dips as enterprise IT spending dropped. Although cloud-based services were more widely used during the global lockdowns, the shift to virtual work made Cisco services less necessary in office buildings.

Its financial guidance for the most recent quarter caused a lot of investors to jump ship, but this could represent a potential value for growth investors seeking a five-year investment. 

The coronavirus crash wasn’t the first time Cisco stock went down – it reached its high back in the summer of 2019. Its earnings went down because of fewer orders from China. As tensions between the American and Chinese governments heated up, this networking giant suddenly lost luster in the latter.

This occurred while Chinese competitor Huawei became the target of the White House, to which the People’s Republic swiftly responded with slower orders of American tech.

It still managed to hold steady until the coronavirus hit, which caused another substantial dip.

Cisco services businesses of all sizes, and about a third of its revenues come from enterprise, while another third comes from small to medium sized businesses (SMB).

Enterprise sales improved as these companies prepared for a new age of remote work. Meanwhile, small business struggles cost the company a loss in revenue as many of them were unable to spend the money on new switches, routers, and other networking equipment.

However, there’s a bright spot in the company’s services business, which saw an uptick as businesses adopted enterprise tools like Webex video conferencing.

The company’s financial statements are insightful to determine its true value.

Cisco Financials Are Cause For Optimism

Cisco’s fiscal year 2020 ended in July, and earnings were reported in August. The company reported a 9 percent year-over-year decrease in revenue at $12.2 billion for the quarter.

Net income was $2.6 billion, which represents a 19 percent increase from the same quarter in the prior year. This led to GAAP earnings of $0.62 per share and gave the company a year-end revenue result of $49.3 billion.

Of this, 51 percent of revenue comes from software and services, which includes Webex.

The company’s total earnings per share was $3.21 for the fiscal fourth quarter 2020. That’s a 4 percent increase from the prior year and good news for investors.

The company’s cash flow for the year is $15.4 billion, compared to $15.8 billion in 2019, and the company is holding $29.4 billion in cash and cash equivalents as of the end of the fiscal year.

This means the company’s approximately $165 billion market cap is more than 10x the company’s free cash flow. It’s also trading at less than 4x annual revenues.

This has some investors bullish on the stock, especially as a long-term investment.

Is Cisco Valuation Too Low?

Cisco’s stock had a stigmatizing 2020. When the fiscal year-end earnings reports showed a slump, some investors immediately jumped ship. But these results ignore the company’s moves for the future.

It starts with the acquisition of ThousandEyes, an internet and cloud intelligence platform. It also spent $100 million on Portshift, an Israeli digital identity pipeline.

This signals the company returning to its roots of acquiring small technology businesses to expand its own.

Although it’s facing rough times, Cisco has a solid B2B footprint that includes VoIP services, hosted collaboration, network emergency response, and IT professional certifications for managing its product line.

The company’s trading in the $40 range entering the 2020 holiday season. This is a deep discount from the $50 range it was trading at since 2018.

This puts its market cap relatively low while still allowing it to pay a $1.44 annual dividend. Its dividend was even raised in 2020, giving it a 3.59 percent dividend yield on a 14.94 percent price-to-earnings ratio.

Investors who believe the stock will rise think that it’s going to be a strong 2021 based on the company’s virtual work services.

Will Cisco Stock Rise?

Cisco’s stock has room to rise, and it’s not taking the losses that other companies are. Still, it’s being heavily outperformed by other tech stocks, like Zoom and Microsoft. This is because it doesn’t have the consumer brand recognition that the other two do.

However, investing in Cisco may be a more prudent option than Zoom, as it has a larger business with more revenue streams, and Microsoft, which saw stock prices skyrocket to a historic high in the aftermath of the coronavirus pandemic.

This positions Cisco right in the middle as a value stock with a dependable dividend payout. However, its growth potential is limited by the slow rollout of 5G networks and a heated U.S.-China trade war. While it’s doing well with enterprises and software, it faces an uphill battle with hardware sales and SMBs.

Is Cisco Stock Undervalued? The Bottom Line

Cisco is a long-standing tech stock from Silicon Valley that works at the foundation of internet communications. It helps businesses leverage cloud-based digital tools for virtual work, ecommerce, and enhanced productivity.

While its Webex video communications platform didn’t get the media buzz of Zoom, it did benefit from the widespread adoption of video calls in business.

The company’s stock is at a low it hasn’t seen in four years. This could represent a discounted opportunity for investors to get in on a long-term investment that pays dividends. Just be mindful of the long-term effects of the escalating U.S.-China trade war and coronavirus shutdowns.

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