In contrast with many high-growth cloud-based tech stocks, Cisco Systems (NASDAQ:CSCO) and Oracle (NYSE:ORCL) have been posting low- to mid-single-digit revenue growth over the last few quarters. Both giant tech companies are transforming their legacy on-premises businesses to adapt to the shift to cloud computing.

But thanks to their large scale, they have been generating enormous free cash flow that allows them to pay a dividend and buy back shares. Besides these similarities, Cisco's competitiveness seems stronger given its dominant position in its markets and its solid balance sheet. Yet the market values Cisco at a small discount to Oracle.

Cisco: from hardware to software

Cisco has been dominating the network equipment market with its switches and routers over the last couple of decades. But with the development of cloud computing, the company had to update its portfolio.

As a result, a few years ago, Cisco initiated its transition into a subscription-based software offering. And besides its networking portfolio, the company now proposes software solutions in various areas such as communications, security, and monitoring. CEO Chuck Robbins confirmed during the last earnings call that software should represent 30% of the company's total revenue by the end of 2020.

Cloud on blurred computer data center background.

Image source: Getty Images.

After eight consecutive quarters of year-over-year revenue growth, management expects next-quarter revenue to decline. But beyond the short-term results, the company is poised to profit from the forecasted increase in network traffic. A Cisco study estimates the global network traffic will increase annually by 26% over the next three years. And emerging technologies such as 400G and 5G should contribute to investments in Cisco's solutions to support this growth.

And while Cisco is shifting its business to software, the company remains a dominant network player. Its trailing-12-month (TTM) revenue reached $52.0 billion. In contrast, Juniper and Arista, two of Cisco's main competitors, posted a much lower TTM revenue of $4.4 billion and $2.5 billion, respectively. In addition, Cisco's TTM operating margin of 27% and free cash flow and $11.6 billion show the company is still highly profitable. And its net cash position of $9.5 billion at the end of its last quarter gives the company ample room to acquire other companies, pay a dividend, and buy back shares.

Oracle: shift to the cloud

In contrast to Cisco's legacy hardware portfolio, Oracle's business has long mostly consisted of software (applications and databases). But Oracle also had to adapt to cloud computing, and it updated its legacy on-premises business to a cloud-based offering.

Oracle's competition seems stronger than Cisco's, though. With its cloud solution, Oracle goes head-to-head against giant companies such as Amazon and Microsoft. And Oracle's enterprise resource planning (ERP) solutions NetSuite and Fusion compete with large vendors such as Salesforce.com and SAP.

As a result, Oracle has been posting flattish revenue growth over the last six quarters, and management guided for weak revenue growth again during the next quarter. But with its highly-profitable software business, combined with its large scale, Oracle posted a strong 35.6% TTM operating margin, and its free cash flow reached $9.53 billion.

The company spent $31 billion over the last 12 months to buy back its shares, whileits net debt increased to $21.1 billion at the end of last quarter.

Cisco wins

Based on the valuation metrics listed in the table below, the market values Cisco at a small discount to Oracle despite Cisco's stronger balance sheet and dominant position in its market.

Valuation Ratios Cisco Systems Oracle
EV-to-revenue 3.50 5.22
EV-to-EBITDA 11.50 12.77
TTM P/E 17.94 18.46
Forward P/E 13.26 13.36

Data source: Yahoo Finance. EV = enterprise value. TTM = trailing-12-months.

Thus, Cisco seems to be a better buy than Oracle. And considering Cisco is transforming its legacy businesses to remain competitive in growing markets, its forward P/E ratio of 13.26 corresponds to a reasonable valuation.