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Cisco Systems Inc(CSCO-Q)

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Is Cisco Stock a Buy?

Motley Fool - Fri Mar 22, 7:15AM CDT

Tech conglomerate Cisco Systems(NASDAQ: CSCO) is known for its computer networking business, which helped to establish today's internet. But the company has expanded beyond its networking roots and now provides a variety of tech offerings, including cybersecurity.

Cisco bolstered its cyber threat protection capabilities with the acquisition of data analytics and cybersecurity firm Splunk on March 18. This addition makes Cisco one of the largest software companies in the world, according to CEO Chuck Robbins.

With this major acquisition -- Cisco's biggest to date -- and the company's stock well off its 52-week high of $58.19 reached last September, is it time to buy Cisco shares? To get an answer, it's necessary to examine the company in more detail. This will help to determine if Cisco is a good long-term investment.

How the Splunk acquisition helps Cisco

Cisco's acquisition of Splunk makes sense since customers must secure their computer networks from cyber threats, particularly now that those networks extend into the cloud. Splunk's product suite provides the monitoring and data insights needed to shift customers "from threat detection and response to threat prediction and prevention," as Robbins described it.

More than that, the Splunk acquisition is a strategic move toward increasing Cisco's software-as-a-service (SaaS) sales. Cisco adopted the SaaS model as a means to generate steady and predictable income.

To that end, the company spent years growing its software subscriptions. This subscription income rose 6% year over year in Cisco's fiscal second quarter, ended Jan. 27, to $6.4 billion. With this growth, subscription sales accounted for half of Cisco's $12.8 billion in Q2 revenue.

The company's subscription sales are about to get bigger thanks to Splunk. Splunk's cloud-based services employ a SaaS model, and comprised $469.4 million of its $1.1 billion in revenue in its last publicly reported fiscal quarter, which ended Oct. 31, 2023.

Cisco's ups and downs

Growing predictable SaaS revenue is important to Cisco because a significant portion of the company's income is derived from selling hardware products, such as the switches and routers used in networking. This results in Cisco's revenue fluctuating up and down based on customer buying cycles.

In fact, the company is seeing reduced spending from its clients right now. This led to a 6% year-over-year drop in Q2 revenue. Cisco's management expects softness in customer spending to continue into the second half of its fiscal 2024. Consequently, the company reduced its full-year revenue guidance from a minimum of $57 billion to $51.5 billion.

The addition of Splunk should help the situation since Cisco's fiscal year guidance excludes Splunk's revenue. Moreover, Cisco management sees the rise of artificial intelligence as a driver of the company's long-term revenue growth.

Robbins stated, "We are clear beneficiaries of AI adoption," noting Cisco's partnership with Nvidia to help businesses build IT infrastructure tailored to AI systems. Cisco indicated that over $1 billion in potential orders for its AI-related infrastructure products could come in fiscal 2025.

Evaluating whether Cisco stock is a buy

Deciding on whether to buy Cisco stock depends on your investing goals. Cisco isn't a high-growth tech company at this point, but it does offer income investors a dependable source of passive income. Cisco's stock provides dividend payouts with an attractive yield over 3%.

The networking giant has increased its dividend consistently for over a decade, even during the height of the COVID-19 pandemic when other companies eliminated dividend payments. Cisco is able to maintain its dividend because it generates solid free cash flow (FCF). Its FCF was $2.9 billion in Q2. Additionally, the company committed to returning at least 50% of its FCF to shareholders annually.

Another consideration when evaluating an investment in Cisco stock is that, as a large, diversified business thanks to acquisitions such as Splunk, Cisco's share price is less susceptible to high volatility. So it can serve as a good stock for a retirement portfolio, such as an IRA.

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Robert Izquierdo has positions in Cisco Systems and Nvidia. The Motley Fool has positions in and recommends Cisco Systems and Nvidia. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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