IoT Related Services to Spur Cisco’s Growth

IoT Related Services to Spur Cisco’s Growth

After reporting reasonably good fiscal 2017 first-quarter earnings that beat analysts’ estimates, the stock of networking equipment manufacturer Cisco Systems Inc. (NASDAQ: CSCO) recorded a high of $31.87 in November. However, in mid-November, the stock fell sharply on the backdrop of earnings warning issued by the company’s CEO Chuck Robbins. The news of scrapping the $1 billion “Intercloud” project and the loss of case against Arisa took the stock price further lower to $29.11. However, the overall rally in the market has enabled the stock to regain a portion of the lost ground. We believe that the stock would rise further from yesterday’s closing price of $30.17, due to the reasons mentioned below.

It is a well-known fact that Cisco is losing market share in router business. Ironically, router business took the Cisco to the helm of networking business a decade back. As more and more companies are developing networking equipment that is heavily software oriented, an investor should make a trading decision based on how the company plans to offset the decline in the revenue from the sale of routers.

Although the company has entered late into software and IoT (Internet of Things) business, still, it has good growth prospects. Cisco has successfully deployed commercial LoRaWan (trademark of Semtech Corp) solutions in the recent past. Analysts believe that the company is best positioned to address the issues of cellular and Wi-Fi technologies with this technology. Cisco is also developing “Fog or Edge” computing solutions- an alternative to cloud computing-which enables distribution of data and applications in a more efficient manner. The company has begun deploying this solution as well. It should be noted that unlike the sale of networking hardware, IoT related solutions create a source of recurring revenue for the company.

Cisco also hopes to gain a lot from the Trump’s proposed tax repatriation plan. If a change in the tax law is brought about in the US, Cisco is expected to repatriate as much as $60 billion, which would be ultimately used for buybacks, dividends and acquisition of companies.

The company offers an attractive dividend yield of 3.5% and earnings growth of between 5% and 10%. Analysts also believe that the company would exceed consensus estimates in the second half of 2017. Thus, considering the growth prospects, Pierre Ferragu, an analyst at Bernstein has given a ‘buy’ rating with a target price of $35 for the stock of Cisco. Based on the above facts, we expect the stock to reflect the fundamentals and appreciate soon.

Technically, the sub-20 reading of the stochastic oscillator indicates an oversold situation. The price chart also shows that the stock of Cisco has firm support at 30 levels. Thus, we can anticipate an appreciation in the share price.

Cisco - Technical Analysis - 10th January 2017

Based on the analysis, a trader can invest in a call option (some brokers refer it as high or above contract) to gain from the forecasted uptrend in the price. The investment is suggested only when the stock trades below $31 in the equity market. An expiry period of one week would be adequate for the call option trade.

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