CSCO Stock – is Cisco’s Stock a Value Today?


hey YouTube I’m Jimmy in this video I’m
gonna walk you through my analysis of Cisco Systems ticker symbol see CSCO this
continues our series where we’re analyzing all 30 stocks in the Dow Jones
Industrial Average with the ultimate goal of taking those companies and
trying to build a great portfolio this is the seventh video in that series and
you can see a link to the playlist in the description below so I’m going to
quickly touch on Cisco’s business and then we can look at a potential shift
that appears to be happening in their core operations or with the direction
of where their business is heading and then we can try to decide if we think
that that shift will move the stock higher from this point going forward so
Cisco breaks out their operations into three primary segments infrastructure
platforms applications and security the infrastructure platform segment
accounted for about eighty percent of revenue while the other 20% was spread
around applications and security now at first glance this is a bit concerning
for me you know from a breakdown perspective mostly because of how the
infrastructure platforms segment is structured this segment mainly works
around core networking technologies think switches routers and data centers
and this is how cisco built their business back when they started in 1984
the hesitation for me and it’s not just my hesitation many analysts are saying
the same thing is times appear to be changing the cloud is steam rolling
forward and sure there’s always going to be a place for this segment which sells
devices that let’s say a big business had it it would be they have the servers
on site as opposed to a business that utilizes the cloud and some server farm
somewhere and the question for me is how will this business look in the next five
years the next 10 if you look at the past five or the past 10 it’s changed
rather dramatically and it looks like Cisco was left a little far behind well
the good news is that the company seems to know this and that’s why they’re
pushing more towards the proper future which is more subscription-based
services versus individual contracts and that’s good from an investor standpoint
because subscription based services tend to be recurring revenue
and you can see this is true in some big acquisitions that Cisco’s made in
recent years which focuses more on their applications and security segments
both the segments which appear to have a much brighter future now this brings us
to some recent acquisitions now one thing Cisco loves to do is make
acquisitions I counted their acquisitions and since 2010 they’ve made
33 acquisitions mostly all-cash acquisitions which assuming that they have
the cash I like better than a company issuing more shares and diluting
current investors which for me generally seems to be a safer thing there are
exceptions to that but generally I prefer a cash acquisition over a stock
acquisition now these acquisitions have ranged in size from as low as 20 million
to as high as 5 billion this table here this shows all the acquisitions since
2010 but since Cisco has almost 50 billion in revenue I’m not terribly
concerned about the 20 million or even 100 million dollar acquisition I’m more
interested in the big ones so this table here this is their largest acquisitions
since 2010 this red one here at the bottom this one actually fell into a
segment that they called other after they acquired this company back in 2012
I highlighted it red because although this is their largest acquisition
recently they’re actually in the middle of selling it which they haven’t
disclosed what they’re selling it for but I figure we can mark that red just
so we know it’s not going to be part of their core business going forward and
the fact that they’re selling this particular segment is interesting to me
because this goes back to the shift I mentioned earlier so that the other
acquisitions we can see that back in 2012 they made an infrastructure
platforms purchase and since then all the big ones have been apps and security
now I think this is a good thing because as we mentioned before I believe that
these two segments have a brighter potential than the infrastructure
platforms segment so for now before we dive into the potential shift in the
business let’s look quickly at their financials so here’s a revenue going
back to 2010 and as you can see there are growing fairly nicely from 2010 to
2013 but then they seem to have stalled out a bit now if we switch over a profit
or net income we see that net income has continued to
grow fairly nicely thanks to improving margins now as we saw from our recent
CVX analysis I think it’s important to compare growth to other competitors in
the same industry so when we look at where Cisco generates their revenue and
looks like competitors would be companies like Juniper Networks or NETGEAR so we can see in this chart that both juniper and Netgear are growing
juniper is a blue bars and netgear is the orange line then if we jump over to their
profit we can see that they’re a bit volatile especially net gears orange
line but this is a good example of why they may not be the best comparison
because juniper is a ten billion dollar company and Negear is a two billion
dollar company meanwhile cisco is a two hundred and twenty billion dollar
company so now if we account for the size companies like IBM or Microsoft
might be a better comparable so this is revenue for IBM and Microsoft IBM is the
green bars and Microsoft this is a dark line interestingly iBM has struggled
recently while Microsoft has done pretty well when we switched to profit we can
see that iBM has once again continued to struggle and Microsoft has turned higher
over the past few years now if we jump back to the profit of Cisco we can see
that relative to peers cisco has done fairly decent to make your profit story
even more interesting especially from an earnings per share perspective is their
buyback program here we’ve added their buyback history over the past few years
now I’m personally a fan of buybacks because I believe it’s a good way to
return value to shareholders but that’s only true if the stock is not overvalued
so was it so what we’ve added next was the average forward p/e during that year
now you may notice that we have 2018 in there and that’s because Cisco’s fiscal
year ends in July so it recently ended so each of these years the average is
actually July – July for that fiscal year now this is interesting especially
because when we consider that the sp500 is currently trading at a forward p/e of
about 18 times but if we look at Cisco’s history we can see that it’s had
a fairly low p/e but now what if we added their own five-year average
to each of those years this is what we come up with now as we could see it
looks like Cisco for the first two years paid less than the five-year average and
more recently than that it looks like that that they paid a bit more than
their five-year average now this brings us to the potential shift the potential
opportunity and some recent news back in February of 2018 after the US tax code
reform was announced Well Cisco announced that they were going to bring
back sixty seven billion dollars from foreign countries into the US then and
only then would they be allowed to do buybacks this repatriation of that cash
allowed for this twenty five billion dollar buyback back in 2018 now they had
authorized 31 billion dollars at the time so there’s still another six
billion dollars available for buybacks now I would say that this partially
explains management’s decision to pay a higher p/e than the average since the
tax change has just happened and they were sort of forced to they they
suddenly had the ability to issue many more buybacks thanks to the you know
influx of cash now another piece of news that recently came out during their last
earnings call was the announcement of the Duo acquisition now this helps push
the advancement of the segment the security segment and I think this is key
for a Cisco to continue to develop now another thing is that on their balance
sheet it looks like Cisco still has about forty billion dollars in cash now
for Cisco this actually isn’t that unusual they’ve had this level of cash
give or take for the past few years now as far as the potential shift in the
business is concerned I think that this acquisition points to it in fact the
past three acquisitions point to the fact that management has recognized that
business is going in a different direction and frankly I’ve been somewhat
surprised that these acquisitions haven’t been larger because don’t forget
Cisco is a two hundred twenty billion dollar company so my question is are
they going to begin to make larger acquisitions we know that they like to
make acquisitions what are they going to do am I going to
continue to push towards the developing cloud business applications
business and the security business and recently management has stated their
push to go towards more recurring revenue streams specifically in the
security and application segments if you pair that with the newly available cash
from the repatriation after the tax changes and I think it’s possible that
management starts to make bigger and bigger acquisitions in those two
segments which I believe will make their revenue stickier and over the long run
has the potential of a shift there historically low p/e multiple to
something that is more broadly in line with let’s say the market or at least
the industry so for me the potential opportunity is the combination of the
fortunate timing of the newly available cash and the management’s push towards a
new business model I actually hope that they don’t pay out the six billion
dollars that they have earmarked for buybacks I would rather they announce an
acquisition that progresses their new business direction and I would be very
excited if that acquisition was a 20 or a 40 billion dollar acquisition Cisco
after all is a two hundred twenty billion dollar company and they need big
acquisitions if they wants to materially move their revenue going forward so I
believe that if Cisco continues to push down this road where they’re progressing
the right kinds of business I believe their p/e multiples should be higher
than the current level of 16x even if it’s just close to the market average of
18x that would imply that Cisco stocks should be worth closer to $60 per share
rather than the current market price of $48 and that’s 25 percent higher I
personally like management’s new direction do you agree do you think that
Cisco looks like a good value at this level is the new direction of the
business already priced into the stock it could be and is the cash really
potential opportunity or have they already gone ahead and spent everything
that would have been used for me the real question about Cisco is whether or
not it belongs in our ideal portfolio this one is a borderline one because I
don’t think we’re going to be able to determine that until we get to the end
of the analysis many people say that Cisco
should be a core holding because of what they do in there the uniqueness of their
offerings but I’m not 100% sure yet we’re going to continue our research
before we can really determine whether or not this is worth that plus I want to
see do they make these acquisitions do they continue to do it
or is it just a theory that we’ve come up with and they never follow through
with it if that’s the case I believe that revenue may continue to struggle to
move forward and their profit growth may be capped out because you can only
improve margins so much so let me know what you think in the comments
below and don’t forget to hit the subscribe button and if you have any
questions or any ideas let me know if you think this one belongs in the ideal
portfolio thanks and I’ll see in the next video

8 Replies to “CSCO Stock – is Cisco’s Stock a Value Today?”

  1. Jimmy, if YouTube allowed me to hit the like button more than once, I would have smacked it 5 more times.

    I was just reviewing CSCO today, and while I think the stock is fantastic (will most likely grab shares in the short term), I agree that I would be on the fence about it for an “ideal portfolio” holding.

    Another great video, looking forward to the conclusion!

  2. Great video. I agree that CSCO's stock has a questionable future. Maybe they can turn things around, BUT I don't think so. Love the analysis

  3. Is my conclusion right: EPS have dropped to 0.02 $ in fiscal 2k18 due to the tax code and the following repatriation of cash?

  4. Great job! An outstanding way to analyze this company. Funny how YouTubers such as Dave Ramsey or Phil Town get likes and subscribers in the 100K when all they do is blah, blah, blah. Thank you for taking the time to share this. I hope you keep sharing the analysis of other companies.

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