Based on stock performances year to date, the question of which is the better buy, Cisco (CSCO +0.31%) or Microsoft (MSFT +0.46%), would seem to be a no-brainer. Cisco is in the midst of a transition away from its legacy switches and routers -- which still drive the majority of revenue -- to cloud-based data centers, security, and the Internet of Things (IoT). Investors haven't exactly thrown in the towel on Cisco, though its stock price is up just 4% in 2017.
As for Microsoft, its transformation consists of dominating cutting-edge new markets including the software-as-a-service (SaaS) cloud wars, developing advanced artificial intelligence (AI) analytic solutions, and commercial augmented reality (AR) technologies. Both Cisco and Microsoft are making significant progress in their respective efforts, but which one gets the nod as the better buy?
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The case for Cisco
One of the reasons for Cisco's so-so stock performance this year is CEO Chuck Robbins' focus on building a sustainable foundation of recurring revenue. It seems some investors don't have the patience or inclination to wait for Cisco's slow but steady transformation.
The thing is, growing a predictable base of ongoing revenue takes time, so the days of double-digit revenue growth are gone. But in the long run, risk-averse investors who prefer steady, predictable performance quarter in and quarter out will be rewarded not only with Cisco's 3.65% dividend yield, but also long-term appreciation.
Last quarter was an ideal example of what to expect from Cisco going forward. Total revenue of $11.9 billion in Cisco's fiscal third quarter was essentially flat compared to last year's $12 billion, which might explain why its share price is down 6% since sharing the news on May 17. But there's more to the Cisco story than total revenue.
In addition to Cisco's emphasis on new markets and recurring revenue, Robbins has promised a more efficiently run business, and it's working. Last quarter, Cisco's operating expenses were $4.3 billion, down 8% compared to a year ago. The result was a 6% increase in operating income to $3.2 billion and a 5% gain in per-share earnings to $0.60.
As for recurring revenue, nearly $3.7 billion of Cisco's total sales were ongoing, and with deferred revenue climbing 13% to $17.3 billion, it's safe to say investors can expect more of the same, reliable results going forward.
The case for Microsoft
To say CEO Satya Nadella and team ended Microsoft's fiscal 2017 on a high note would be a gross understatement. For the quarter, Microsoft reported a stellar 13% jump in revenue to $23.32 billion, and it more than doubled per-share earnings from last year's $0.39 to $0.83 a share.
The best part for investors with an eye toward the future is that Microsoft's top and bottom lines took a backseat to its commercial cloud revenue run-rate of over $18.9 billion, a market expected to generate nearly $250 billion in revenue this year, and more than $380 billion by 2020.
Outside of a 3% decline in enterprise service sales and the expected drop in Surface revenue, virtually every business unit showed improvement in the fourth quarter. Thanks to Microsoft's emphasis on SaaS delivered via the cloud -- a natural given its commanding market position in business and consumer software -- Azure platform revenue skyrocketed 97% to end its fiscal year.
Cloud-based commercial Office sales jumped 43%, Dynamics CRM revenue was up a whopping 74%, and even the one-time beleaguered Bing search enjoyed a 10% year-over-year gain. And despite its fantastic quarterly run, Microsoft stock still trades at or below industry averages by most all valuation methods.
The case for which is a better buy comes down to this: While Cisco is on the right track and will almost certainly reward patient investors, Microsoft is further along the path to reinventing itself, which is why it's the better buy.
