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Patient Cisco Investors Can Bet on Next Year's 5G Equipment Surge Today

By Anders Bylund - Feb 13, 2020 at 9:27AM

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The networking veteran delivered steady-as-she-goes results in the second quarter, expecting more of the same in the next report. Things will be different in 2021 and beyond, though.

Networking equipment giant Cisco Systems (CSCO -1.13%) reported results Wednesday evening, describing the second quarter of fiscal year 2020. The company met Wall Street's expectations and set up next-quarter guidance roughly in line with current estimates. Cisco expects some major growth catalysts to kick in, but not until next year.

Cisco Systems' second-quarter results by the numbers

Metric

Q2 2020

Q2 2019

Change

Analyst Consensus

Revenue

$12.0 billion

$12.4 billion

(3.5%)

$12.0 billion

GAAP net income

$2.9 million

$2.8 million

2%

N/A

Adjusted earnings per share (diluted)

$0.77

$0.73

5.5%

$0.76

Data source: Cisco Systems. GAAP = generally accepted accounting principles.

Cisco's sales declined year over year in each of its three geographic regions. The fastest drop was found in the largest market as the Americas region's sales fell 5% to $7.0 billion. This particular slowdown was driven by soft orders for server systems and service-provider routers. Brexit was a drag on the European market as a whole, led by British weakness above all else, driving revenues 1% lower in the Europe, Middle East, and Africa segment. A 3% revenue drop in Asia Pacific was led by difficult market conditions in China. Though Chinese orders only constitute roughly 2% of Cisco's total sales, that market's revenues plunged 30% lower.

5G growth lies around the corner

On the earnings call, CEO Chuck Robbins highlighted how Cisco should benefit from profound changes to networking infrastructures everywhere.

"The long-term secular growth trends of 5G, Wi-Fi 6, 400-gig and the shift to the cloud remain and we expect to benefit from them," Robbins said. "This is a multi-year transformation and we are managing our business well while staying focused on helping our customers build simpler, more secure, and cost-effective networks. The broad adoption of multi-cloud and modern application environments is changing how the world's largest networks are built, operated, and secured and Cisco is at the center of this transition."

To be clear, Cisco isn't equipped to provide complete solutions for 5G networks. The company offers high-speed routers and switches to manage the back-end data transfers but the wireless systems at the front end will come from leading equipment builders in that space such as Ericsson (ERIC 2.48%), Nokia (NOK 0.00%), Samsung (OTC: SSNLF), and Huawei. Robbins is content with focusing on what his company does best as the 5G market evolves.

"We have early wins on IP infrastructure to support 5G rollouts in over 30 customers around the world. Some of those are cell site aggregation, backhaul, some core wins," he said. "We think the 400-gig transition, as well as the 5G build out, will be the drivers that we'd be looking for over the next couple of years."

A blue Ethernet cable, twisted to form a cartoon-style cloud.

Image source: Getty Images.

What's next for Cisco?

The bulk of the 5G opportunity lies in 2021 and beyond, though. Uncertainty in the global economy is motivating Cisco's largest customers to slow down on their network infrastructure installations. As such, Cisco's third-quarter guidance pointed to adjusted earnings near $0.80 per share on revenues in the neighborhood of $12.68 billion. These targets are broadly in line with current analyst estimates and with typical quarter-by-quarter seasonality patterns in recent years.

The stock has stayed inside a fairly tight range of $43 to $58 per share over the last year, currently sitting near the midpoint of that trading space. This report essentially underscored existing trends within Cisco's trailing results, and the positive changes from 5G and Wi-Fi 6 upgrades are longer-term opportunities. Patient investors can buy Cisco shares today and wait for the wheels of change to start turning in 2021, locking in an effective dividend yield of 2.8% and an affordable valuation of less than 15 times forward earnings.

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Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$49.00 (-1.13%) $0.56
Nokia Corporation Stock Quote
Nokia Corporation
NOK
$4.88 (0.00%) $0.00
Telefonaktiebolaget LM Ericsson (publ) Stock Quote
Telefonaktiebolaget LM Ericsson (publ)
ERIC
$7.84 (2.48%) $0.19

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