If you’re old enough to have been investing in 1999 and 2000, you might be getting that nostalgic feeling right about now. As a provider of networking equipment during the dotcom bubble, Cisco (NASDAQ:CSCO) was a market darling back in the day. Thus, it’s worth considering whether it’s time to give this apparent has-been another look in 2024.
On a psychological level, that’s easier said than done. Nowadays, Cisco serves as a worst-case scenario as financial pundits ponder whether high-flying NVIDIA (NASDAQ:NVDA) will end up like Cisco did.
In other words, there’s hardly any peer pressure to invest in Cisco now. However, for contrarians and true value seekers, this should sound like a perfect setup for a turnaround tale with powerful profit potential.
Nothing but Street beats for Cisco
When a profitable company consistently beats Wall Street’s earnings expectations but its share price is down, that’s when value hunters should pounce on the opportunity. It doesn’t happen very often, and when it does, it’s typically in unexpected places.
You can’t get any more unexpected than Cisco, since the company has been out of favor for at least two decades. Apparently, Cisco was the world’s most valuable company in March 2000. Fast-forward 24 years, and investors who bought CSCO stock during the dotcom-hype phase still haven’t gotten back to breakeven.
More recently, Cisco stock is down by several percentage points year to date even though large-cap technology stocks are by and large doing well. However, this isn’t a reflection of poor performance on Cisco’s part.
The company has beaten analysts’ consensus EPS forecasts for every quarter since the start of the COVID-19 pandemic. Yet, the market has refused to reward Cisco’s Street beats in a meaningful way.
Nevertheless, the company meaningfully rewards its loyal shareholders with growing dividend payments. In fact, the company recently hiked its quarterly dividend to 40 cents per share, bringing its forward annual dividend yield to 3.13%, which is significantly higher than the technology sector’s average annual dividend yield of 1.025%.
Additionally, if you’re a fan of buybacks, Cisco repurchased “approximately 25 million shares of common stock… for an aggregate purchase price of $1.3 billion” in Q2 of FY2024.
All in all, there’s scant evidence that Cisco is falling apart at the seams. For example, consider Cisco’s growing margins. In the second quarter of fiscal 2024, the company’s gross margin increased to 64.2%, versus 62% in the year-earlier quarter.
In addition, the situation is extremely different today than it was in 2000 as CSCO stock looks like a great value today. On a trailing 12-month basis, Cisco’s price-to-earnings (P/E) ratio of 14.87 is much more favorable than the sector median P/E ratio of 29.56.
Cisco: The reinvention and the acquisition
Since the market effectively rejected post-2000 Cisco as a network-router maker, it’s hard to blame the company for wanting to reinvent itself. Thus, the company took the opportunity to rebrand itself as a purveyor of artificial intelligence (AI) hardware in 2023 and 2024 — not unlike NVIDIA, ironically.
Thus, the question now is whether the market is willing to believe that Cisco is truly a new, improved company in the 2020s. Judging by the price action of CSCO stock, the answer is “no,” or at least “not yet.”
Cisco’s management can’t be faulted for not trying. CEO Chuck Robbins shouted to the proverbial rooftops that he wants the company to “play a critical role as our customers adopt AI and secure their organizations.” Moreover, in a press release about a recent technology showcase, Cisco mentioned AI more times than you can shake a stick at.
At the same time, the company will have an opportunity to present itself as a data-analytics and cybersecurity market contender. That’s because the company is making headway in its bid to buy out Splunk (NASDAQ:SPLK).
In an important step forward, the European Commission approved Cisco’s plan to acquire Splunk for $28 billion. The EC determined that the proposed acquisition “would not raise competition concerns.”
Buying out Splunk could be a huge coup for Cisco. In a sign of strong demand for the company’s cybersecurity offerings and cloud solutions, Splunk generated $1.49 billion in fourth-quarter fiscal-2024 revenue, easily beating Wall Street’s call for $1.28 billion.
Again, it’s not a question of whether Cisco can successfully reinvent itself; it’s a question of whether the investing community believes it. This remains to be seen, but if you’re a fan of compelling value-and-yield combos, feel free to dust off your turn-of-the-millennium party hat and relive the good times with a buy order for CSCO stock.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
