Better Blue-Chip Tech Stock: Cisco Systems vs. Oracle

Cisco (CSCO 0.43%) and Oracle (ORCL 0.72%) are two tech stalwarts that are better known for buybacks and dividends rather than growth. But over the past 12 months both stocks rallied more than 40% and outperformed the S&P 500 and NASDAQ. Let's see why investors flocked to these two blue-chip tech stocks -- and if either stock is worth buying right now.

The rotation from growth to value tech stocks

Last year the pandemic lit a fire under certain companies in the e-commerce, cloud, and remote work sectors, which benefited from stay-at-home trends. But this year many of those high-growth stocks stumbled as investors pivoted toward reopening plays.

As a result, mature tech companies like Cisco and Oracle, which trade at lower valuations and face easier year-over-year comparisons in a post-pandemic market, became appealing investments again.

Image source: Getty Images.

The differences between Cisco and Oracle

Cisco is the world's largest manufacturer of networking switches and routers. It generated 54% of its revenue from its infrastructure platforms business, which manufactures that networking hardware and other devices, last year. The rest came from its applications, security, and services businesses.

Cisco has been launching more software subscriptions to lock in its enterprise customers and reduce its dependence on hardware sales. It generated 44% of its revenue from subscriptions in fiscal 2021, which ended in July, and it expects that percentage to rise to 50% by fiscal 2025.

Oracle is the world's largest database management company. It initially provided on-premise database hardware and software, but it's been transforming those platforms into cloud-based services.

Oracle has also expanded its ecosystem beyond database products with more ERP (enterprise resourcing planning) services. It launched its Fusion suite of ERP applications shortly after acquiring PeopleSoft, JD Edwards, and Siebel Systems in 2005. It also bought the cloud enterprise software company NetSuite in 2016 to strengthen its ERP ecosystem with additional cloud-based services.

Which company is growing faster?

Cisco and Oracle have both generated tepid revenue growth over the past five years. Both companies also suffered slowdowns during the pandemic last year, followed by gradual recoveries throughout fiscal 2021.

Source: Annual reports. YOY = Year-over-year. *Excluding the sale of its SP Video CPE business.

Cisco's growth decelerated last year as the pandemic disrupted purchases of networking hardware from enterprise and data center customers. It also lost contracts in China as the trade war escalated.

But Cisco's revenue growth accelerated in the second half of 2021, and it expects its revenue to rise 5% to 7% in fiscal 2022. It also expects its revenue to rise at a CAGR of 5% to 7% between fiscal 2021 and 2025. Cisco attributes that rosier outlook to the enterprise market's post-pandemic recovery, the expansion of its subscription business, and multiple expansion opportunities into newer markets like hybrid work, automation, and end-to-end security systems.

Oracle's growth accelerated last year as robust demand for its cloud-based services, especially its Fusion and NetSuite ERP services, offset the softness of its on-premise businesses during the pandemic.

Oracle expects its revenue to rise by the mid-single digits in constant currency terms in fiscal 2022 as its cloud growth accelerates. Oracle didn't provide any longer-term estimates like Cisco, but analysts expect its revenue to grow about 4% (in reported terms) in both fiscal 2022 and 2023.

Which company is more profitable?

Oracle generated much stronger earnings growth than Cisco over the past five years, mainly because it repurchased a lot more shares.

Source: Annual reports. *Excluding the SP Video CPE business.

Over the past five years, Oracle reduced its outstanding shares by 33% as its stock rose more than 120%. Cisco reduced its outstanding shares by 16% as its stock advanced more than 80%. 

Cisco expects its non-GAAP EPS to grow 5% to 7% this year, then grow at a CAGR of 5% to 7% from fiscal 2021 to 2025. It expects a growing mix of higher-margin subscription revenue to boost its EPS.

Oracle expects to generate a higher percentage of its revenue from its higher-margin cloud business than its lower-margin on-premise business this year. Analysts expect Oracle's non-GAAP EPS to dip 1% this year as it ramps up its cloud spending, then grow 11% next year as its margins stabilize.

The valuations and verdict

Cisco trades at 16 times forward earnings, while Oracle has a forward P/E ratio of 17. Both stocks are fundamentally cheap, but Cisco's stock looks cheaper relative to its future growth rates.

Cisco's forward dividend yield of 2.6% is also higher than Oracle's 1.5% yield. Cisco usually spends more of its free cash flow on dividends than buybacks, while Oracle prioritizes big buybacks over dividends.

Cisco and Oracle are both safe tech stocks, but Cisco's stronger growth rates, lower valuation, and higher dividend make it the better buy. It's also offering investors a much clearer long-term outlook than Oracle.