It was business as usual for the San Jose-based network giant. After Wednesday's closing bell, Cisco (CSCO) - Get Report delivered yet another solid set of results that beat revenue and earnings expectations for the 20th consecutive quarter.
Not surprisingly, top-line strength came from virtually all business segments and geographies, with the exception of the smaller Asia-Pacific division that suffered from lumpiness in the service provider vertical. Cisco has been benefiting from favorable macro factors that include global data traffic growth, momentum in the on-premise-to-cloud network transition, an increase in connected devices and the technology upgrades to 5G and Wi-Fi 6.
To be fair, full credit should still be given to Cisco and its management team for capitalizing on the positive industry trends. After repositioning its products and services away from a legacy, equipment-heavy portfolio through a more software-centric and subscription-based strategy, the company has been able to maintain a slow but steady sales and orders growth pace.
Probably most impressive in the third fiscal quarter was the 21% increase in security revenues, benefiting in part from acquisitions, which have turned the once small segment into one that now accounts for nearly 10% of total product revenues. In addition, the success of the Catalyst 9000 family and the migration of its software-based networking solution to the cloud helped to keep the large infrastructure platform business growing at a respectable, even if decreasing, 5% rate.
So Is The Stock An Obvious Buy?
There isn't much of a bearish argument to be made on Cisco stock that could be reasonably supported by lack of enthusiasm for the company's recent operational performance. The winds have been blowing in the right direction, and this will likely continue to be the case in the foreseeable future. Better yet for shareholders, Cisco's ongoing transition to a recurring revenue model should provide more consistency and better visibility into future results.
That said, an investment in a stock is only as good as the price paid for the shares. Despite the 11% pullback between mid-April 2019 and earlier this week, Cisco is up nearly 70% over the past two years, having soared ten percentage points above the broad equities market (SPY) - Get Report in the past 12 months alone. On valuation, the stock's forward P/E multiple is likely to top 18 once the market re-opens on Thursday, the highest levels reached since 2017.
It is worth noting that recent EPS growth has been fueled primarily by share repurchases -- more than half of the 18% year-over-year improvement in the most recent quarter. The recent spike in stock buybacks was made possible by the 2017 tax reform that allowed Cisco to put its large foreign cash reserves to work. Today, the company's net cash position has dwindled to $10.9 billion from a much larger $34 billion this time last year, which could in part explain the most recent dividend payment increase of 6% being the lowest since the company started making distributions to shareholders.
To be clear, I commend Cisco for taking advantage of the macro tailwinds and delivering yet another strong quarter. But at the same time, I suspect that most of the optimism about the company's prospects may be fully baked into the current stock price. Shares could continue to move higher on strong execution, but I believe the rise will be much more subdued than it has been over the past several quarters.
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The author has a long position in CSCO stock and a short position in out-of-the-money call options.