Buy Boring Cisco Systems as Market Uncertainties Grow

Stocks to buy

As market participants become increasingly wary of the risks facing the stock market, the desire for a proven performer has put Cisco Systems, Inc. (NASDAQ: CSCO) and Cisco stock on their radar.

Most telling is Cisco’s response to lower DRAM prices (DRAM is a type of computer memory) and the tariff war between the U.S. and China. The company said that it acquired DRAM for its hardware before DRAM prices went up. And with DRAM prices now falling, Cisco can renegotiate its contract with suppliers.

CSCO also said that the trade war between the U.S. and China will have little impact on its results. Not only is Cisco stock insulated from macro risks, but it has a great deal of other positive attributes that should appeal to investors.

Positioned for Growth

Cisco’s business units all generated growth last quarter. Connected devices, network and security, enterprise routing including SD-WAN, and data are among the company’s businesses that are growing by double-digit percentage levels.

Meanwhile, Cisco launched a number of new products that are benefiting from back-end trends. For example, the market is transitioning from 100G to 400G, so Cisco’s recently-launched Nexus 400G switches should boost the company’s revenue for several quarters. Even if the economy slows and enterprise customers cut their budgets, data centers won’t reduce their purchases of  Cisco equipment because of the increases in bandwidth and scale it enables.

Last quarter, CSCO introduced the first hybrid cloud solution that’s (NASDAQ: AMZN) AWS unit is using. Meanwhile, Cisco’s software-as-a-service security portfolio continues to add more features, and its acquisition of Duo Security will enable it to provide its customers with a way to securely interface with their users.

Strong Results

Cisco’s qualitative accomplishments mirror its financial results. Last quarter, its revenue rose 8% to $13.1 billion, while its non-GAAP earnings per share rose 23% to 75 cents. Every segment reported solid growth, with its wireless unit growing by double-digit percentage levels.

CSCO’s operating margin of 31.9% may rise over time as the company shifts its revenue mix from hardware to software. Software sales made up 57% of Cisco’s total revenue last quarter, and that percentage will only keep increasing.

Cisco ended the quarter with $42.6 billion in cash and cash equivalents after it returned $6.5 billion to shareholders, through a $5 billion share buyback and a $1.5 billion quarterly dividend. Cisco stock currently has a dividend yield of 2.85%.

If the shares are viewed as a recession-resistant investment, Cisco stock, up 27% from its yearly lows, could reach new highs. An 8% – 10% stock price increase, plus the dividend yield, would net a respectable low double-digit return for investors.

The Outlook for the Current Quarter

Cisco expects its revenue to grow 5% – 7% this quarter and predicts that its gross margin will come in at 63.5%-64.5%. CSCO provided EPS guidance of $0.71 – $0.73 for its current quarter.

Cisco can definitely meet its conservative guidance even as macro headwinds persist. The company offers solutions that lower the operating costs of its customers and increase their efficiency while boosting their performance. CSCO might even beat its guidance if the sales of its new products exceed expectations.

When chip stocks like Micron Technology (NASDAQ: MU) are being hurt by lower chip prices, the best hedge is buying names, such as CSCO stock, that benefit from lower input costs.

The Valuation of Cisco Stock

Analysts have a $52 price target on Cisco stock, according to Tipranks. The valuation of Cisco stock is very compelling after the shares fell below the $48 peak they reached earlier this month.

The stock’s price-earnings ratio of 19 is on the low side, considering the company’s strong performance. Technology investors who are seeking value and some income should consider Cisco, a company with a boring business and multifaceted growth.

As of this writing, the author does not own shares in any of the companies mentioned.

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