Shares of Cisco (NASDAQ:CSCO) recently rallied to a multi-year high after the company reported its second quarter earnings. Its revenue rose 7% annually to $12.4 billion (excluding the divestment of its service provider video business), beating estimates by $30 million. Its non-GAAP earnings climbed 16% to $0.73 per share, topping expectations by a penny.

For the third quarter, Cisco expects its revenue to rise 4%-6% annually, and for its non-GAAP EPS to grow 15%-18%. For the full year, analysts expect Cisco's revenue and earnings to rise 5% and 17%, respectively.

Networking connections across a city.

Image source: Getty Images.

Cisco's growth rates look robust, but investors might be wondering if the stock is running out of room to run after nearly doubling over the past three years. Today I'll highlight four main reasons investors should still consider buying Cisco after its post-earnings rally.

1. Impressive revenue and earnings growth

Cisco was once considered a slow-growth tech stock. That changed over the past year as sales of its infrastructure platforms (routers, switches, and other hardware) rebounded on strong demand from campus customers, and its Security and Applications businesses continued growing both organically and inorganically.

That trio of businesses account for Cisco's core Products division, which grew its revenue 6% annually during the quarter and accounted for 75% of the company's top line. All three categories posted healthy sales growth during the quarter.


YOY revenue growth

Percentage of Product revenue

Infrastructure Platforms









Source: Cisco Q2 earnings report.

Cisco's Services division, which generated the remaining 25% of its revenue, posted 1% growth. Software subscriptions accounted for 65% of its total software revenue, marking a ten percentage point increase from the prior year quarter.

The shift toward subscription-based revenue boosts its margins and earnings, which are buoyed even more by aggressive buybacks. Cyclically low DRAM prices are also reducing the production costs of its hardware devices. These tailwinds all boosted Cisco's top and bottom line growth considerably in recent quarters:


Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019













Year-over-year growth.  Source: Cisco quarterly reports.

2. Stable gross and operating margins

Cisco's total non-GAAP gross margin fell 100 basis points annually to 64.1% during the quarter as its Product and Service gross margins both contracted. Its non-GAAP operating margin stayed flat at 32.1%.


Q2 2018

Q2 2019

Gross margin



Operating margin



Non-GAAP basis. Source: Cisco quarterly reports.

But for the third quarter, Cisco expects its non-GAAP gross margin to come in between 64%-65%, and for its non-GAAP operating margin to remain between 31%-32%. Those stable margins indicate that major macro headwinds -- like trade tensions with China -- probably won't dent its earnings growth.

For comparison, Cisco's smaller rival Juniper Networks (NYSE:JNPR), which recently reported its sixth straight quarter of declining sales, saw its non-GAAP operating margin fall 160 basis points to 21.1% during that quarter.

Servers in a data center.

Image source: Getty Images.

Cisco's Chinese orders were roughly flat during the quarter, but that softness was offset by sales to other countries, which boosted the company's total emerging markets revenue by 6%. During the conference call, Cisco CEO Chuck Robbins stated that the company still "saw zero difference" in overall demand for its products and services.

3. Plenty of cash for shareholder-friendly moves

During the quarter Cisco spent $5 billion repurchasing 111 million shares at an average price of $45.09 per share. It authorized a $15 billion increase to that buyback program, which boosts its total authorization to $24 billion (equivalent to 11% of its current market cap).

It also raised its dividend 6% to $0.35 per share, which boosts its forward dividend yield to 2.8%. That nearly matches Juniper's forward yield of 2.9%.

Cisco repatriated most of its overseas cash last year, so it has plenty of cash (nearly $10 billion) to spend on buybacks, dividends, and domestic acquisitions. It also held over $40 billion in cash, cash equivalents, and investments at the end of the quarter. Therefore, Cisco plans to keep tightening up its valuations with buybacks and rewarding patient investors with dividend hikes for the foreseeable future.

Check out the latest Cisco earnings call transcript.

4. It's still surprisingly cheap

Last but not least, Cisco's stock remains surprisingly cheap at 14 times forward earnings. Juniper, which has much weaker fundamentals than Cisco, is only slightly cheaper at 13 times forward earnings.

Cisco's low multiple, its solid dividend yield, and its well-diversified business make it one of the safest big tech stocks to buy today. I think Cisco has plenty of room to extend its post-earnings rally.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.