Cisco Systems (CSCO -0.50%) and Microsoft (MSFT 1.82%) are both blue-chip technology stocks that usually generate stable returns for long-term investors. But over the past three years, Cisco's stock has only risen 3% as Microsoft's stock soared 240%.
Cisco's networking business churned out slow and steady growth, but Microsoft grew faster as its cloud-based services expanded. Will Microsoft continue to outperform Cisco for the foreseeable future?
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Cisco faces an unexpected slowdown
The past two years were bumpy for Cisco. In its fiscal 2022, which ended in July 2022, revenue only grew 3% as its core networking business struggled with supply chain constraints. But in fiscal 2023, revenue rose 11% as the company finally overcame those issues and met the market's pent-up demand for new networking hardware.
In its recent first-quarter report, however, Cisco stunned investors by predicting revenue would decline 4%-6%, with nearly flat adjusted earnings-per-share (EPS) growth in fiscal 2024. It had previously guided for 0%-2% revenue growth and 3%-5% adjusted EPS growth.
Cisco attributed that massive guidance cut to slowing orders across the enterprise, service provider, and cloud markets. It said its customers had been deploying their existing networking hardware at a slower-than-expected pace in this challenging macro environment and one to two quarters of its shipped orders were still waiting to be deployed.
That grim guidance cast some doubts on Cisco's ability to achieve its long-term goal of growing revenue and adjusted EPS at a compound annual growth rate (CAGR) of 5%-7% from fiscal 2021 to fiscal 2025.
Cisco's planned acquisition of Splunk (SPLK), which is expected to close within a year, might propel it past that target by expanding its smaller observability segment. Investors, however, might not be too impressed by that inorganic growth. Cisco's stock looks cheap at 12 times forward earnings and pays a forward yield of 3.3%, but its near-term slowdown could limit its upside potential.
Microsoft is spinning lots plates at once
Microsoft has been growing a lot faster than Cisco. Its revenue rose 18% in fiscal 2022, which ended in June 2022, and grew 7% in fiscal 2023.
The post-pandemic slowdown of the PC market throttled the growth of its Windows and Surface businesses over the past year. But the company largely offset that pressure by expanding its cloud-based enterprise services (Office, Dynamics, and LinkedIn), as well as its Azure cloud infrastructure platform.
Azure notably grew faster than its two closest competitors, Amazon Web Services (AWS) and Alphabet's Google Cloud Platform (GCP), in its latest quarter. Azure's growth also accelerated -- partly driven by its new artificial intelligence (AI) features -- while AWS and GCP reported flat and decelerating year-over-year growth, respectively, in their latest quarters.
Microsoft's investments in OpenAI, the creator of ChatGPT, have also enabled it to integrate its partner's AI services into its Bing search engine and Azure cloud services. Those integrations might help Microsoft keep pace with Google in the search race while widening its moat against AWS in the cloud infrastructure market. Microsoft also significantly expanded its Xbox division with its acquisition of Activision Blizzard this year.
Analysts expect Microsoft's revenue and adjusted EPS to both grow about 6% in fiscal 2024 before accelerating in the double-digits again in fiscal 2025. Those growth rates look stable, but the company's stock isn't cheap at 34 times forward earnings. Its forward yield of 0.8% also won't attract any serious income investors in this high-interest-rate environment.
The better buy: Microsoft
Cisco's stock looks cheaper and pays a higher dividend but will remain in the penalty box until its orders stabilize and revenue growth accelerates again. Microsoft isn't a bargain yet but still has a lot more upside potential than Cisco -- especially if its cloud growth continues to accelerate at a faster rate than AWS and GCP.
