Will Cisco Disappoint in 2016 as Well?

Although Cisco (CSCO) has been a disappointing stock to hold over the last few months, I still like the stock. Cisco reported a strong quarter and, in my opinion, the current weakness in the stock is an opportunity for long-term investors.

In spite of many headwinds in its service, Cisco reported earnings per share of $0.59, $0.03 more than the consensus estimate of $0.56, whereas the company’s revenue for first quarter 2016 came in at $12.7 billion, in line with the analyst estimate of $12.7 billion.

Despite the headwinds in its routing section, which was decelerated by the timing of new deliveries, Cisco shared strong first quarter results.
Going forward, I think Cisco has many tailwinds that can drive the stock higher and its juicy dividend yield makes the stock even more impressive.

The company’s switching business looks capable of extracting profit from the market. According to the latest yearly report, the company’s switching business accounts for almost 40% of Cisco’s total revenue. In fact, revenue from switching business jumped 5 percent, mainly due to the improved LAN fixed-configuration switches sales. Although revenue from switch business segment slackened as compared to prior quarter, it highlights Cisco’s potential in the segment.

The main reason for the company’s slackened sales is that whitebox manufactures like Facebook have started consuming Cisco’s market share. At the time of fourth-quarter earnings call, the company stated that shift from its legacy switching products to Nexus 9000 switches would take considerable time, faintly impacting the rate of growth for this segment. Despite the near-term consequence, Cisco has confidence that the shift will start building an impression on the balance sheet in the upcoming next few quarters.

Though Cisco holds a robust position in networking hardware market, the company is strategizing to shift its attention towards being a provider of software solutions. If Cisco successfully adopts the software solutions, the company’s profit will likely increase with the time as the software segment conveys considerably higher margins. Over the next five years, the company expects revenue from software segment to surge in the middle of 12-15 percent yearly and subsidise nearly one quarter of the Cisco’s revenue by 2020. Given the uncertainty in the market, I think Cisco’s long-term prospect look bright, and that makes it a good investment.


With the marker expected to stay volatile in 2016, I think investors should look at companies like Cisco. Not only does the company have a good dividend yield, it also has paved the way for long-term growth and the stock will likely outperform other stocks in a bear market, making it one of my top picks.
Published on Jan 7, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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