Cisco Systems (NASDAQ:CSCO) is often considered a mature tech stock and is owned by many of its shareholders for stability and income instead of growth. Bucking that trend, the networking leader's stock price has rallied more than 40% over the past 12 months and outperformed both the S&P 500 and the Nasdaq Composite.

Cisco's stock also held steady after the company unveiled fresh goals for the next four years at its investor day on Sept. 15. Let's see why those plans might generate even more bullish buzz for Cisco.

The Earth with hundreds of connected digital points of light.

Image source: Getty Images.

Cisco hit its previous four-year targets

Cisco held its previous investor day four years ago. At the time, it claimed it would generate more revenue from software, subscriptions, and services from fiscal 2017 to fiscal 2021 (which ended this July) to reduce its overall dependence on the commoditized networking hardware market.

Cisco generated 30% of its total revenue from software sales in fiscal 2021, up from 20% in fiscal 2017 and matching its own expectations. Subscriptions accounted for 79% of its total software revenue in fiscal 2021, up from 52% in 2017 and beating its own target of 66%.

Cisco generated 53% of its total revenue from software and services in fiscal 2021, compared to 42% of its revenue in fiscal 2017 and surpassing its goal of 50%.

Between fiscal 2015 and 2021, Cisco's software revenue increased at a compound annual growth rate (CAGR) of 10%, while its subscription-based software revenue rose at a CAGR of 23%. It supported that growth with acquisitions of companies across the higher-growth cloud, security, and Internet-of-Things markets.

Cisco expects that momentum to continue

Cisco expects its total revenue to grow at a CAGR of 5% to 7% between fiscal 2021 and 2025. That would represent a significant acceleration from fiscal 2017 to 2021, when its revenue rose at a CAGR of 1.5%. It also expects its adjusted earnings per share to grow at a CAGR of 5% to 7% through 2025.

Cisco believes its product subscription revenue will increase at a CAGR of 15% to 17% through 2025. It also expects subscriptions to generate half of its revenue in fiscal 2025, up from 44% in 2021.

The expansion of its total addressable market, or TAM, beyond routers and switches could drive that growth. Cisco expects the TAM for its current business to grow at a CAGR of 5% to $260 billion from 2021 to 2025, and for its newer "expansion markets" (including end-to-end security, agile networks, hybrid work, optimized applications, optical upgrades, and IoT) to grow at a CAGR of 18% into a $140 billion market.

Cisco also expects the global "future of work and automation" market, which will include newer remote work, automation, and cloud-based technologies, to be worth up to $500 billion. 

In other words, Cisco expects the world to become even more connected over the next few years, and it plans to leverage its market-leading position in networking hardware and software to cross-sell even more services. It will lock more of those customers into subscriptions, which will generate higher-margin revenue and widen its moat against smaller competitors like Juniper.

Introducing new business units to track that growth

Starting in fiscal 2022, Cisco will replace its three main product categories -- infrastructure platforms, applications, and security -- with five new ones: secure, agile networks; hybrid work, end-to-end security, internet for the future, and optimized application experiences.

The critics will likely claim this shift obfuscates the slower growth of Cisco's legacy routers and switches business, and seems geared toward generating media hype with newer-sounding names.

However, Cisco's new reporting units will also make it easier for investors to spot its stronger and weaker businesses, which were previously clumped together in three opaque divisions. Therefore, this change should benefit investors as Cisco expands beyond its core networking hardware and software businesses.

Its streak of buybacks and dividends will continue

Cisco has reduced its number of outstanding shares by 21% over the past decade. It's also raised its dividend every year after its first payment in 2011. That trend should continue over the next four years. Cisco plans to return at least 50% of its free cash flow to shareholders through buybacks and dividends, even as it expands its newer businesses with fresh investments and acquisitions.

Cisco was a tepid investment for many years, but its growth is accelerating as it evolves and expands. Its stock trades at 16 times forward earnings and pays a forward dividend yield of 2.6%, and that low valuation and solid yield should limit its downside potential as a new growth cycle begins.

 
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.