For the fourth consecutive quarter, Cisco Systems' (NASDAQ:CSCO) revenue declined year over year. And the midpoint of management's next-quarter revenue guidance range is leading again to a decreasing top line.

However, Cisco's stock price corresponds to modest expectations, and the tech giant is stabilizing its business as it is transitioning to a subscription-based and software-as-a-service (SaaS) portfolio. So is Cisco stock a buy?

Challenging legacy business

During the fiscal first quarter, ending on Oct. 31, Cisco's revenue fell 9% year over year to $11.9 billion, which compares well to management's forecast drop of 9% to 11%. But that remains a meaningful decline.

The networking specialist experienced challenges in its enterprise and commercial markets, partly because of the coronavirus-induced uncertain economic environment. In addition, it is still facing the secular decline of its legacy hardware portfolio.

In particular, the company's infrastructure platforms segment, which includes networking and server devices, dropped 16% year over year to $6.3 billion.

In contrast, software and cloud solutions partly offset that negative trend. Cisco doesn't communicate the individual performance of its applications, but CEO Chuck Robbins revealed some encouraging metrics during the earnings call. The number of participants in the communications platform WebEx almost doubled to 600 million in October compared to March. And the company's security segment grew 6% year over year to $861 million thanks to the strong performance of cloud solutions such as Umbrella (a software offering for remote workers to securely access cloud applications).

IT technician with a laptop and engineer are talking in data center while walking next to server racks.

Image source: Getty Images.

More SaaS and subscription-based offerings ahead

Cisco should still profit from the growth opportunities in its core markets, though. Enterprises must invest over the next many years to benefit from the increased networking performance enabled by recent technologies such as 400G, 5G, and WiFi 6.

But beyond that boost, Cisco is trying to differentiate its portfolio by leveraging its broad range of technologies into simplified subscription-based and SaaS solutions. As an illustration, the company announced in October a new partnership with the software video streaming specialist Qwilt to package a video streaming platform for telecommunications service providers. And Chuck Robbins announced the company will reveal similar offerings over the next 12 months. 

The success of such transformation remains to be seen, but early signs of success materialized. For instance, the simplified security solution SecureX released in June has already been deployed over 4,000 organizations. 

In addition, Autodesk's CFO Scott Herren will take over as Cisco's CFO on Dec. 18. Its experience in the transformation of the software company to a SaaS and subscription-based business over the last several years will certainly help Cisco reaching similar goals. 

Is Cisco stock a buy?

Given Cisco's forecast stabilizing top-line in the fiscal second quarter (1% revenue decline at the midpoint of revenue guidance range), the stock jumped by almost 10% during after hours.

But with a market cap at 3.7 times trailing 12-month revenue, Cisco's valuation doesn't look cheap because of its lack of growth.

However, you should also take into account Cisco's high profitability thanks to its huge scale. During the last quarter, the company's non-GAAP (adjusted) operating margin reached 32.7%, down from 33.6% in the prior-year quarter. And management anticipates operating margin will stay in the range of 32% to 33% during the fiscal second quarter.

With such high margins, Cisco stock is trading at only 13 times forward earnings, which corresponds to modest expectations. And with $15.4 billion of cash, cash equivalents, and investments in excess of total debt at the end of the last quarter, the company can withstand a potentially prolonged recession. It can also proceed with acquisitions to accelerate its transformation and fuel its growth.

Granted, given Cisco's large scale and legacy businesses, investors should not expect spectacular revenue growth anytime soon. But with its low valuation, I see Cisco stock as a buy as the tech giant has been generating solid profits while modernizing its portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.