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Tech industry icon Cisco systems (CSCO) has completed the acquisition of a software company Splunk (SPLK) for $28 billion in cash. The big question: Is the deal 'transformative' for CSCO stock?
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Fiscal third-quarter earnings results for Cisco stock are expected on May 15. The results will include Splunk for the first time.
Cisco aims to increase recurring revenue from subscription-based software and services and move away from its core business of selling computer network switches and routers.
With roots in data analytics software, Splunk has expanded into cybersecurity. Moreover, it is undergoing a transition to a software-as-a-service business model of on-premise products.
Cisco Stock: Splunk's Strategic Fit
“Our initial approval suggests the deal can meet Cisco's margin and cash growth targets, but we do not view it as transformational,” Raymond James analyst Simon Leopold said in a report. “We see Splunk as a good strategic fit and trust Cisco management on the cultural fit. Cisco has a stated strategy to grow its software and recurring revenue within the mix, and Splunk fits that vision. Splunk adds $4,000 2 billion in annual recurring revenue to Cisco's recent $25 billion ARR.”
Shares of Cisco are down nearly 7% this year after rising 6% in 2023.
Shares of Cisco fell after the computer networking giant reported second-quarter earnings and revenue that fell from a year earlier but topped consensus estimates as product orders fell again. The company's guidance for CSCO stock in the current quarter ending in April exceeded expectations.
The company plans to cut 5% of its workforce, about 4,200 jobs, in a new round of cost cuts.
CSCO Stock: Rival HPE makes acquisition
In the meantime, Hewlett Packard Enterprises'(HPE) take over of Juniper berry (JNPR) will make HPE a stronger, more direct competitor to Cisco, analysts say.
As a rival Arista Networks (A NET), CSCO stock could get a long-term boost from the increasing use of artificial intelligence software. AI workloads processed in cloud data centers require more computing resources and network bandwidth.
With a dividend yield of 3%, Cisco shares still find support among institutional investors.
The outlook for CSCO stock depends on spending trends for cloud computing infrastructure and enterprise and telecom networks. July quarter earnings beat expectations, while the company's fiscal 2024 revenue outlook fell below expectations.
CSCO Stock: Shift to Software
From its initial public offering in 1990 through the early 2000s, Cisco flourished as a major supplier of the hardware to build Internet networks, both to telecom companies and to large companies outside that sector. Shares of Cisco rose more than 100,000% during that period, before the dot.com bubble burst.
Cisco remains dominant in the corporate campus networking market.
At the end of April, Cisco had $23.3 billion in cash and equivalents plus short-term investments on its balance sheet. That gives it plenty of resources for a major acquisition if the opportunity arises.
Analysts with a bullish view on CSCO stock expect the company to gain share in the cloud titan market versus Arista Networks. It beat Cisco to the cloud data center market by grabbing Microsoft (MSFT), Facebook (FB) And Amazon.com (AMZN) as customers.
During the coronavirus pandemic, corporate spending on data networks slowed due to increased office vacancies. One view is that corporate networks will become less important as remote working becomes entrenched.
As a result, Cisco stock should increase investments in next-generation enterprise networks. The company aims to help enterprise customers build hybrid network architectures that leverage on-premise data centers and cloud computing infrastructure.
Cisco wants to build its Webex video conferencing platform versus Microsoft and Zoom video communication (HM). It recently acquired Socio Labs to power Webex events. Cisco is working on long-distance holographic communication.
Cisco Stock: Fundamental Analysis
The maker of computer networking equipment has managed to fill the backlog after struggling with supply chain problems last year.
One bright spot for CSCO stock was sales of the Catalyst 9000 switches. There are also opportunities for Cisco in the field of data center upgrades.
The so-called 'internet cloud' consists of data centers the size of a warehouse. They are filled with racks of computer servers, data storage systems and networking equipment. Most cloud computing data centers now use 100 gigabits per second communications equipment.
Meanwhile, a data center upgrade cycle to 400G technology has been postponed.
Analysts also say Cisco is well positioned as enterprise buyers move to networking technology called software-defined wide-area networking, or SD-WAN. The technology often uses bandwidth on the public Internet. With SD-WAN, companies have less need for expensive private data networks rented from telecom companies.
The buildout of 5G wireless networks has yet to emerge as a growth driver for CSCO shares. Cisco collaborates with Dish network (DISH) to sell business 5G services to large companies.
Cisco's growth through acquisitions
Much of Cisco's revenue growth comes from acquisitions.
Cisco agreed in late 2019 to buy Britain's IMImobile, which sells cloud communications software, in a deal worth $730 million.
In May 2020, Cisco acquired ThousandEyes, a network intelligence company, for approximately $1 billion.
In 2017, Cisco acquired software maker AppDynamics for $3.7 billion. At the end of 2017, it bought BroadSoft for $1.9 billion.
In July 2019, Cisco acquired Duo Security for $2.35 billion, marking its largest cybersecurity acquisition since purchasing Sourcefire in 2013. The acquisition of Duo Security strengthened Cisco in an emerging category called zero trust cybersecurity.
Cisco agreed in 2019 to acquire Acacia Communications for $2.6 billion in cash. The Chinese government has delayed approval of the deal. In January 2021, Cisco increased its offer for Acacia to $4.5 billion and the deal ultimately closed.
Cisco Stock Basics
Cisco's fiscal Q2 profit fell 1% from a year earlier to 87 cents on an adjusted basis. Sales fell 6% to $12.8 billion.
Analysts estimated Cisco would earn 84 cents on revenue of $12.71 billion, according to FactSet.
For the April quarter of fiscal 2024, Cisco forecast earnings of 85 cents at the midpoint of expectations, compared with analyst estimates of 92 cents.
Additionally, Cisco says it expects revenue of $12.2 billion at the midpoint of its expectations. Analysts forecast sales will fall 3.7% to $13.09 billion.
Cisco Stock: Is It Buy Now?
In the long term, Cisco stock analysts expect the company's margins to improve as more revenue comes from software products.
CSCO stock currently has a relative strength rating of 24 out of a best possible 99. The best stocks typically have an RS Rating of 80 or better.
Meanwhile, Cisco stock also owns an IBD Composite Rating of 55 out of a best possible 99, according to IBD inventory check. The best growth stocks have a composite rating of 90 or higher.
Shares have an accumulation/distribution rating of D, according to IBD MarketSmith Analysis. The rating analyzes price and volume changes in a stock over the past 13 trading weeks.
As of May 5, Cisco stock has an entry point of 50.58. It is trading well below the entry point.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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