General Electric (GE 1.07%) has existed for over a century, and despite working in different industries, shares traits with Cisco Systems (CSCO 0.61%), a computer networking company born during the personal-computing boom of the 1980s. Both began by developing new technology, and both diversified beyond their roots. Today, GE and Cisco deliver solutions to businesses and governments around the world.

But both have experienced challenges in recent years, and are businesses in transition. Which company has the greater potential to turn a corner and return to growth? An analysis of each company clearly identifies which is the better buy.

A yellow diamond road sign stands against a blue sky, showing the words, "Change just ahead."

Image source: Getty Images.

Cisco's evolution

In its latest earnings release, covering the second quarter of fiscal 2020 (the period ending on Jan. 25, 2020), Cisco reported a 4% year-over-year revenue decline. A big challenge is the trend toward cloud computing, which means fewer organizations are buying Cisco's networking hardware. Instead, they are leveraging third parties to manage IT hardware in the cloud.

So it's not a surprise that revenue for Cisco's infrastructure platforms segment declined 8% year over year, from $7.1 billion in Q2 2019 to $6.5 billion in Q2 2020. This is the largest part of its business, representing more than half of the company's $12 billion in Q2 revenue.

Cisco has worked to diversify beyond its networking roots, and now offers both hardware and software solutions. Its software business includes cybersecurity, services such as tech support, and its AppDynamics software platform for companies to monitor IT infrastructure.

Cisco's videoconferencing software, WebEx, has been a rare bright spot amid the coronavirus pandemic. With people forced to work from home, WebEx achieved a record 324 million users in March. Its latest user numbers are more than double what they were at the start of the year.

Also, Cisco has adopted a software-as-a-service (SaaS) business model for its software products. This provides Cisco with a recurring revenue stream from subscriptions that has grown steadily. As of Cisco's second quarter, subscriptions accounted for 72% of its software sales, and AppDynamics enjoyed double-digit growth.

Another of Cisco's key growth areas is the Internet of Things (IoT). The company announced on April 6 its intent to acquire Fluidmesh Networks to strengthen its IoT offerings. Fluidmesh provides reliable wireless technology in urban and industrial settings, such as in public transit systems or at a port, where it's difficult to maintain wireless signal strength.

In addition, an attractive element of this technology stock is that it pays a dividend, which currently yields over 3%.

GE's transformation

Like Cisco, GE is a business in the midst of transformation. CEO Larry Culp's main priority is to return the company to financial health. GE is saddled with a large debt load, and the company has been focused on paying it down through the sale of assets and cost-cutting measures such as reducing its dividend.

The efforts have been paying off. GE's industrial net debt was 4.8 times its EBITDA in 2018; at the end of 2019, that ratio was reduced to 4.2. The company's goal is to get that number below 2.5 for its core industrials business. To that end, GE recently sold its biopharma business unit for net proceeds of approximately $20 billion to pay down its debt. 

After spinning off or selling parts of the company, GE now consists of four business lines plus its GE Capital financial services division. The company's power business primarily focuses on making gas turbines to produce electricity, while its renewable energy segment does the same using wind turbines. The other two areas are aviation, which builds and maintains aircraft engines, and healthcare, which creates medical devices.

Aviation is GE's largest segment, generating $32.9 billion of the company's $95.2 billion in 2019 revenue. The power business delivered $18.6 billion, but that represented a year-over-year decline of 16%, as demand for its gas-powered turbines dropped.

Despite the aviation segment's success, it has taken blows. It suffered from last year's grounding of Boeing's 737 Max jets, since a GE joint venture with Safran makes their engines. Now, the coronavirus pandemic has essentially shut down the airline industry. Consequently, GE has pulled its 2020 financial guidance, citing uncertainty around the pandemic and warning that its adjusted earnings per share would come in "materially below" its prior guidance.

The final verdict

GE is the more vulnerable of the two companies. Its power segment was already in decline before global economies became hampered by the pandemic, and given the company's reliance on aviation, the airline industry needs to bounce back before GE can follow.

Cisco is diversifying beyond its core networking business via SaaS software sales. Meanwhile, its hardware business has new opportunities for growth through the IoT and rollout of 5G wireless technology. Therefore, Cisco is clearly the better buy between the two.