Cisco (NASDAQ:CSCO) and Oracle (NYSE:ORCL) stand alongside tech luminaries of the 20th century. But the industry changes quickly, and in the 21st century, companies can be left behind as the world's businesses transition to cloud computing technologies.

Both Cisco and Oracle found themselves in that unenviable position. They made strides to realign products and service models to meet the demands of today's businesses. Let's examine where each company is in its respective drive to adapt to market needs, and determine which is the better buy.

A close-up of a gray computer keyboard where the return key has been replaced with a blue key labeled "cloud" with a cloud icon.

Image source: Getty Images.

Cisco's transition

Cisco was a computer networking powerhouse at the turn of the century, when a business had to rely on its own hardware to support IT infrastructure needs. But its business deteriorated as clients moved away from buying hardware and transitioned responsibilities like managing servers (and the associated costs) to cloud infrastructure providers like Amazon.com and its Amazon Web Services cloud computing.

The company evolved its business, and now has a mix of hardware and software products, the latter designed to benefit from the subscription pricing strategy of the software-as-a-service business model. Cisco found success in this mix, growing fiscal-year 2019 revenue by 7% year over year to $51.7 billion. 

More recently, however, the company experienced a slowdown as reflected in fiscal-year 2020 earnings for the second quarter. Revenue declined 4% year over year to $12 billion. It was also a decline from the previous quarter's $13.2 billion. Cisco's guidance for the third quarter forecasts a year-over-year decline in the range of 1.5% to 3.5%. That would be three quarters in a row of declines.

The trade war with China didn't help, but Cisco also battles a range of competitors across its diverse product suite. For example, its AppDynamics software monitoring product goes head-to-head against rivals like New Relic, and its WebEx conferencing software competes against fast-growing Zoom Video Communications, among others. Consequently, Cisco's Q2 applications division revenue, which includes AppDynamics and WebEx, declined 8% year over year.

Yet opportunities are on the horizon as emerging technologies such as 5G and the Internet of Things provide new growth channels for Cisco. And now, with the coronavirus pandemic forcing many to work from home, its WebEx product has reached all-time highs in usage. Moreover, Cisco pays a dividend, and in its second quarter delivered $2.4 billion in payouts and share buybacks to investors.

Oracle's transformation

Like Cisco, Oracle faced the challenge of transitioning its products to accommodate today's IT needs. It went through several acquisitions to bolster its cloud computing prowess. Oracle purchased NetSuite, the first cloud company, in 2016, and Aconex, a cloud-based platform for construction projects, in 2017.

When the company announced third-quarter earnings for fiscal 2020 on March 12, it showed that revenue had grown 2% year over year to $9.8 billion on the back of its cloud services business. That division accounted for 71% of Oracle's revenue.

The outsize revenue contribution of Oracle's cloud services illustrates the company's achievement in transitioning its legacy on-premises database business to a modern, cloud-based infrastructure. Oracle also maintains a solid balance sheet with cash alone accounting for nearly $24 billion. Consequently, the company decided to continue last year's share buyback program by authorizing repurchase of an additional $15 billion in stock.

Oracle's challenge lies in how it fares against competition. Given how much it relies on its cloud business, the company must maintain leadership in the database arena against competitors like Amazon and MongoDB. To that end, Oracle entered into a partnership with Microsoft last year for the two companies to combine cloud offerings. 

Moreover, the coronavirus pandemic injects near-term uncertainty. CEO Safra Catz stated on the Q3 earnings call that it's unclear how Oracle's customers and suppliers will be affected by the pandemic. This led to wide Q4 guidance ranging from a 2% decline to a 2% increase in revenue on an adjusted, constant-currency basis. Much of its cloud revenue is subscription based, so the company has some insulation against a downturn.

The final verdict

Of these two technology stocks, it's a tough call between Oracle's steady cloud business or Cisco's mixed array of products. Oracle seems like the obvious choice given Cisco's recent revenue declines.

But I believe Cisco is the better buy. There's significant upside for Cisco in the years ahead thanks to new technologies like 5G, and it's already generating more revenue than Oracle. In addition, Cisco's competitors are not the size of Amazon. It's not a high-growth stock, but Cisco's name recognition and leadership in many of the areas it plays in mean that it can continue to steadily grow over the long term.