What a time it’s been for Cisco. In the past six months alone, the company’s stock price has increased by a massive 50.2%, reaching $110.66 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Cisco, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Cisco Not Exciting?
Despite the momentum, we’re swiping left on Cisco for now. Here are three reasons we avoid CSCO, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Cisco’s sales grew at a mediocre 4.5% compounded annual growth rate over the last five years. This was below our standard for the business services sector.
2. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Cisco’s margin dropped by 6.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Cisco’s free cash flow margin for the trailing 12 months was 19.4%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Cisco’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Cisco isn’t a terrible business, but it doesn’t pass our quality test. After the recent rally, the stock trades at 23.9× forward P/E (or $110.66 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top digital advertising picks.
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