Networking equipment giant Cisco Systems (CSCO 3.57%) hasn't been kind to its investors recently. The stock has fallen 18% over the past 52 weeks, missing out on a 12% gain in the S&P 500 index. The tech-heavy Nasdaq Composite Index rose 24% over the same period. Is it time to give up on this struggling giant, or is Cisco a solid buy right now?
Why is Cisco's stock falling?
The bulk of Cisco's negative stock returns followed from a modest second-quarter report in mid-February. Cisco's sales fell 4% year over year and adjusted earnings rose by 6%, all roughly in line with analyst estimates. However, those Wall Street projections were set according to a disappointing set of official guidance targets from Cisco's first-quarter report.
Cisco's management admitted that many target markets are struggling these days, held down by macroeconomic challenges like Brexit and the Chinese-American trade tensions. The coronavirus outbreak did not affect the company's guidance for the third quarter and was only mentioned in passing on Cisco's second-quarter earnings call. As the disease continued to spread across China and the world, Cisco's shares fell just a little bit faster than the market as a whole. Investors clearly expect a significant coronavirus impact on Cisco's results in 2020, and I wouldn't be surprised to see the company issuing a new set of lower third-quarter estimates.
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This too shall pass
Cisco isn't taking this difficult period sitting down. The company is knee-deep in a huge strategy shift, stepping away from the relatively low-margin networking hardware market to focus more directly on software and services instead. This change should not only widen Cisco's profit margins over time but also result in a smoother stream of mostly subscription-style revenues.
At the same time, Cisco is looking forward to the global rollout of 5G wireless networks and related services. This will form the core of Cisco's growth engines for the next couple of years, but the market isn't expected to skyrocket until 2021. The global economy needs to calm down a bit, followed by broader investments in network infrastructure and 5G-capable mobile devices.
These things will take some time, and investors can be short-sighted sometimes. You can pick up Cisco shares at bargain-bin prices right now. The stock trades at just 12.4 times forward earnings. Low share prices also result in generous effective dividend yields, and Cisco offers a meaty 3.4% yield right now.
So a patient investor can pounce on Cisco's temporary weakness to lock in both generous dividend yields and a buy-in price right at the stock's 52-week lows. If share prices continue to slide from here, you can always add to your position over time. You will thank me for this idea three to five years from now as the macroeconomic issues inevitably fade and the 5G revolution starts in earnest.
