Cisco Stock Investors Will Keep Winning As The Trade War Heats Up
The revival of older tech companies continues. In recent years, we’ve seen Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and other such powers of the 90s tech boom turn back into hot stocks again after years of doing nothing. Cisco (NASDAQ:CSCO) is becoming the latest to buck all expectations and turn once more into a star performer. CSCO stock is 6.2% below its 52-week high.
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Cisco stock peaked around $80 a share in 2000, a lofty level that most analysts assumed the shares would never reach again. CSCO crashed to the teens following the dot-com implosion and would not reach $40 again until 2017. As recently as the end of 2016, it was still trading at just $30. Now, however, shares have doubled in just a couple of years and are making a run to top their long-standing all-time high. What’s led Cisco’s revival, and will the good times continue?
Rare Tech Trade War Winner
While the trade war hasn’t been a disaster for the U.S. stock market as a whole, it’s had an almost universally negative impact on tech stocks in particular. That said, CSCO stock has been unusual in that it is gaining from the tensions with China. Why’s that? The answer is 5G.
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Until recently, it appeared that Huawei had a dominant lead in the race to build 5G gear. It got so bad at one point that Cisco CEO Chuck Robbins had to assure the market that there wouldn’t be just one supplier of 5G equipment. With Huawei’s central role in the Chinese tech spying scandal, however, the tables have turned. Huawei’s CFO is in legal trouble, while the Trump administration is putting the screws on the company. The White House has urged European nations, for example, to stop buying products from Huawei as well.
Cisco is the clear winner from this. Until recently, most analysts assumed Huawei would be the dominant player in this space. But Cisco never gave up, and now the political winds have given the company a golden opportunity. As Robbins put it in an interview with Barron’s earlier this year: “We’re singularly focused on 5G, and have every confidence we will win”. He added that, “I would put our innovation against theirs or anyone else in the world […] I feel not only can we be competitive, but we are beating them.”
The battle for 5G is still in the early stages. Some estimates suggest that less than 5% of mobile traffic will be on 5G by the end of 2019. That leaves plenty of room for Huawei to regain its edge if political pressure eases. But for now, Cisco has to like its odds. For what it’s worth, Nokia (NYSE:NOK) is another potential winner in 5G if Huawei can’t regain its leadership role.
Earnings Strength in Details
Cisco’s recent earnings report was a good one, and was stronger than it may look at first glance. Revenue just barely topped expectations, while GAAP earnings beat consensus by three cents a share. That’s all fine, if not extraordinary.
Where things get good is when you look at the details. The company’s gross margin ticked up nicely. This was aided by a rather remarkable 12% increase in operating income, while operating costs grew by only 1%. This is showing the power of Cisco’s growing subscription and services businesses. Additionally, the company put in solid guidance for next quarter, casting aside worries that the company was seeing a slow down due to trade war issues.
CSCO Stock Shed Dead-Money Valuation
In recent months, Cisco’s P/E ratio has marched steadily higher. Not too long ago, CSCO stock was trading for as low as 10x earnings. Like Intel and Microsoft, Cisco stock was treated as “dead money”, good for little more than the dividend. Throughout 2018, Cisco’s forward P/E ratio advanced to around the 14x mark. Now, CSCO stock has hit 17x forward earnings with the latest burst of enthusiasm.
That shows just how bad sentiment had been until recently. That 17x forward earnings is hardly terrible for a leading tech company that is pushing something like 6% revenue growth this year. Additionally, it’s worth noting that Cisco is increasingly deriving its revenues from subscriptions and services. Like so many tech firms have done in the past, Cisco stock’s P/E ratio will rise as the market credits its more stable and long-lasting subscription-based revenue streams.
You shouldn’t forget about the dividend here either. Even with the strong rise in CSCO stock, it is still yielding 2.5%. On top of that, it is a leading dividend growth play. Over the past five years, Cisco has grown its dividend by a compounded 20% per year.
Cisco Stock Verdict
Obviously Cisco stock has gone up a lot over the past year. It’d be better to buy a dip, should one present itself in coming weeks.
Even at $54 per share, however, CSCO stock should make its owners more dough in 2019. As the market prices in further upside from 5G, Cisco stock could trade toward $70 by the end of the year.
At the time of this writing, Ian Bezek owned INTC and CSCO stock. You can reach him on Twitter at @irbezek.
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