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Better Buy: Cisco Systems vs. Oracle

By Leo Sun - Updated Apr 14, 2019 at 10:24AM

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One of these mature tech stocks is clearly a better investment than the other.

Cisco ( CSCO 1.30% ) and Oracle ( ORCL 0.79% ) are both mature tech stocks, but the former rallied nearly 20% over the past 12 months as the latter stayed nearly flat. Though Cisco impressed investors with several quarters of accelerating growth, Oracle posted flat sales growth and relied heavily on buybacks to boost its earnings.

I compared these two stocks last July, and concluded that Cisco's steady growth and deployment of repatriated cash on buybacks, dividends, and acquisitions made it the better long-term buy. Cisco has outperformed Oracle by a wide margin since that article was published, but can it maintain that lead this year?

A bull climbing up a stock chart.

Image source: Getty Images.

Comparing Cisco and Oracle's businesses

Cisco is the world's largest maker of networking routers and switches. It also bundles security software and other enterprise applications with its hardware products.

Cisco generates most of its revenue from its infrastructure business, which sells routers, switches, and other wireless hardware. This unit generates slower growth, and faces competition from other major players like Huawei, Arista Networks, Hewlett Packard Enterprise, and Juniper Networks.

Most of Cisco's growth comes from its smaller applications and security businesses. These units, which Cisco often expands via acquisitions, usually generate double-digit sales growth to complement the single-digit growth of its infrastructure business. Bundling these software services with its hardware widens Cisco's moat against its competitors and allows it to cross-sell more services.

Network connections across a city.

Image source: Getty Images.

Oracle generates most of its revenue from on-premise database and business software products. These products generate very slow growth in a highly saturated market.

To revive its top-line growth, Oracle launched cloud-based services like the Fusion Cloud, which provides human capital management, customer relationship management, and enterprise management tools for large companies. Oracle's other growth engines include its Supply Chain and Manufacturing Cloud applications, as well as the cloud-based ERP (Enterprise Resource Planning) platform it gained from its acquisition of NetSuite in 2016.

Many of Oracle's higher-margin cloud services are generating double-digit sales growth, but most of those gains are offset by the declines in its lower-margin legacy businesses. Moreover, Oracle's decision to stop reporting its public cloud services revenue separately last year makes it difficult for investors to gauge the company's turnaround efforts.

Check out the latest earnings call transcripts for Cisco and Oracle.

Which company is growing faster?

Cisco's sales growth accelerated throughout most of the past year as bandwidth-hungry enterprise campus customers placed higher orders for more infrastructure products.

That growing enterprise footprint, along with its acquisitions of companies like Duo Security and Broadsoft, enabled Cisco's applications and security businesses to generate robust growth. Here's how Cisco's business fared over the past four quarters:

Metric

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Revenue

4%

6%

8%

7%

Non-GAAP EPS

10%

15%

23%

16%

Year-over-year growth. Data source: Cisco quarterly reports.

Cisco repatriated $67 billion in overseas cash last year, and it spent most of that cash on buybacks, dividends, and acquisitions. It's sitting on $10 billion in cash, so it still has plenty of room to tighten up its valuation, reward income investors, and expand its higher-margin software portfolio. Analysts expect Cisco's revenue and earnings to rise 5% and 18%, respectively, this year -- which are robust growth rates for a stock that trades at 16 times forward earnings.

Oracle generates much slower growth than Cisco for two reasons. First, demand for its on-premise database software and hardware is sluggish. Second, the growth of its cloud services is decelerating, possibly due to tougher competition from Microsoft and Amazon, which are both expanding into the cloud-based database market.

Instead of deploying more cash on acquisitions or research and development to strengthen its cloud businesses, Oracle spent most of its cash on buybacks over the past year, which helped it squeeze out a streak of earnings beats with nearly flat sales growth:

Metric

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Revenue

3%

1%

0%

(1%)

Non-GAAP EPS

11%

18%

16%

8%

Year-over-year growth. Data source: Oracle quarterly reports.

Analysts expect Oracle's revenue to dip 1% this year as its earnings rise 9%, which is significantly lower than its forward P/E of 14. Oracle can keep treading water by repurchasing its shares, but its revenue growth will remain under pressure unless it makes some bold divestments or acquisitions.

The clear winner: Cisco

Cisco's well-balanced business, higher growth rates, and lower dependence on buybacks make it a better investment than Oracle. Cisco's stock is also cheaper relative to its earnings growth, and its forward yield of 2.7% is much higher than Oracle's 1.4% yield.

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.

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Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$56.96 (1.30%) $0.73
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$88.94 (0.79%) $0.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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