Should you buy, sell, or hold Cisco (NASDAQ:CSCO) stock in 2014? Here's your answer. The economy is experiencing some slight recovery in the United States and some other parts of the world. It's a very slight recovery, but it's enough to make a difference in many businesses and their stocks. Cisco is a beneficiary of this because it is prompting optimism among investors that the government and tech businesses will start spending more money on shoring up their IT departments and in creating jobs in those areas. Since Cisco is already one of the leaders in IT, it stands to benefit financially if this optimism is proven correct. It is a stock on the precipice of exploding in value if things fall into place the way the economy is prompting investors to expect.
Cisco is a Growth Stock
Cisco has undoubtedly good fundamentals, which make it an excellent growth stock with long-term investment potential. Its business model is solid, it has a strong share of the market among its competitors (most of the technological world uses at least one Cisco product, particularly routers), and a healthy reinvestment of profits. Its growth rate has averaged 7.74% for the past five years and it is forecast to continue growing up to 8.33% in the next few years. It is the industry leader in ROE at 17.8%, and it is the third in the tech industry at EPS growth. Founded in 1984, Cisco has certainly had its ups and downs in the market, but it always comes back to long-term profitability by keeping up with competitors, making new acquisitions, and leading in new technological innovations.
The Current Outlook for Cisco
Things are looking pretty good for Cisco. It now has the number one market share in cloud computing as of Q1 2013, having overtaken both HP (NYSE:HPQ) and IBM (NYSE:IBM) in that important area by 15%. It has also seen a 32% increase in its wireless business throughout the quarters this year. In addition, Cisco acquired security software company SourceFire (NASDAQ:FIRE) this year to bolster its own lackluster security programming. Clearly, this is a company on the move and with a finger in nearly every pie of the tech industry.
Cisco's promise of future profits is causing it to edge out its two main competitors, Brocade Communications Systems, Inc. (NASDAQ:BRCD) and Juniper Networks, Inc. (NYSE:JNPR). All companies have seen similar price fluctuations of their stocks at the same times over the past year. They've essentially been moving in symmetry with each other on the stock charts. However, for the most recent quarter, Cisco has been slightly outperforming Brocade. This is a good sign for Cisco, since Brocade had taken the lead in the market in the middle part of this year. Juniper has mostly traded slightly below both Cisco and Brocade, though not by much. This jump ahead of Brocade in the most recent quarter shows a surge of consumer confidence in Cisco.
While Cisco is doing very well in some ways, it is falling behind in others. Both Brocade and Juniper are ahead of Cisco in the area of data center fabric switching, which is an important area for a tech company to be in today. It is also behind other tech companies in key areas such as WAN optimization, wireless LAN, and application delivery controllers.
This doesn't necessarily mean bad things for Cisco. Opportunities in all of the areas in which it has fallen behind are numerous and the market is likely to be wide open for years into the future. Cisco has over $40 billion in profits a year that can be invested into these areas in which it needs to catch up and it has plenty of time, motivation, and opportunity to do so.
Cisco: The Gem in Disguise
What is really great news for Cisco right now is that its stock has been trading with minimal investor expectations since the tech bubble burst of 1999. It traded at an all-time high of $80 per share back then. Lately, it has been trading closer to $24 per share. With its dominant positions in certain areas of the tech industry, its opportunities for growth in others, and its recent acquisitions, there is plenty of room for improvement, and an intrepid investor might find that there are hidden rewards to be had in Cisco stock if it's purchased now and investors are patient. Cisco is a formerly powerful company that is poised on the precipice of greatness once again. Investors who are paying attention will see this potential.
It's clear that Cisco is an appealing stock to buy right now. However, before investors put their money into Cisco, it's important to know the company's prospects for continuing its upward momentum. This fundamental question will be the main determinant in whether Cisco stock is a buy, sell, or hold for 2014.
Looking more closely at fundamental and technical data regarding the company and its stock will point to an answer.
A Fundamental Analysis of Cisco
Cisco performed very well during Q2-2013. Its net sales were up by 5% from last year. It also had a 44% improvement on net income from last year. Shareholders also saw a 45.7% increase in earnings per share. This translates to 40 cents per share last year to 59 cents per share in the most recent quarter this year.
The net income for the company is now at $5.2 billion, which is a 30% increase over the first six months of last year. Even better news for shareholders is that the company's cash flow improved by 6.45% from the most recent quarter last year to the most recent quarter this year. This represents a 32% increase on a quarter-by-quarter basis over last year. The company has paid out $1.2 billion to shareholders this year as well. Payments have been in the form of dividends and share buybacks. Cisco is actually way ahead of any of its competitors when it comes to paying dividends, making it a valuable portfolio addition to those who are looking for dividend stocks.
Cisco management is expecting a 4 to 6% increase in revenue in Q3 this year from Q3 last year. They are also expecting a 61 to 62% increase in gross margins. If these expectations prove true, it will result in even higher dividend spikes for shareholders.
A Technical Analysis of Cisco
Cisco is highly undervalued at the present moment. It is trading at 12.5x on a P/E basis, which is 58% less than the industry average. Its competitors, Brocade and Juniper, are trading at much higher valuations on a P/E basis. However, Cisco is valued fairly and on par with the industry average on the S&P 500.
All signs point to Cisco being a strong value stock right now. It's priced at a bargain, but everything about its fundamental and technical analyses show that it is highly likely to improve in market value soon. Its P/E ratio, for example, ranks it 10th overall among its competitors. Its Price to Earnings Growth Ratio is 1.47, which is very close to the industry-perfect number of 1, and much lower than the highest in the industry, which is Palo Alto Networks (NYSE:PANW) at 6.12. Cisco is a stock with nothing but potential to go up and its undervalued price makes it an attractive buy for those looking to cash out on future increases.
It looks like Cisco is going to continue to pay well in the form of dividends for a while. Being a growth, value, and dividend stock all in one makes it the perfect hat trick of desirable qualities that combine to form an excellent investment. More investors are going to be turning to stocks like Cisco as the market continues to slowly improve.
When its price catches up with its actual worth, those who invested now will see significant profits from their investment. These gains will likely be seen throughout 2014 and beyond as Cisco continues to solidify its place in the market and outperform its competitors.
However, if you're going to buy Cisco, now is the time while it's still undervalued. The stock's value has already risen 20% in the past month as the market once again realizes Cisco is an industry powerhouse that isn't going anywhere any time soon and will continue to be profitable as it adapts and evolves along with the rest of the tech industry, which is something it has excelled at doing since its beginning.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.