Cisco (NASDAQ:CSCO) stock has declined by close to 10% this year, compared to the broader S&P 500 which has rallied about 13%, as customers paired back on spending on networking gear through the Covid-19 recession. Cisco’s Revenue declined by about 9% year-over-year over the last two quarters. However, we think Cisco stock looks relatively attractive at current levels for a couple of reasons.
Firstly, Cisco’s core business of selling networking hardware such as switches and routers is known to be cyclical. With a Covid vaccine likely to be available in most developed markets by early next year, the economic recovery is expected to gather pace and IT spending is expected to rebound sharply. Cisco being the go-to company for enterprise networking solutions, with a leading market share in most categories, should see Revenue pick up.
Secondly, Cisco has been gradually pivoting to a more software-driven model. Over FY’20, the company said that 51% of revenues came from software and services. Products such as WebEx video conferencing tools and Cisco’s cybersecurity business are seen as key drivers of this shift. Moreover, as of Q4 FY’20 (FY ends July), about 78% of Cisco’s software revenue was subscription-based. This could also be a positive driver for the stock, given the higher margins and relative stickiness of software revenue streams.
Thirdly, with broader economic growth likely to return next year, the investors could rethink their stance on value tech stocks including Cisco, which have been out of favor this year, as they focused on growth sectors such as software as a service and mega-cap Internet platform plays. Cisco currently trades at about 14x adjusted FY’20 earnings, making it a relatively attractive pick as investors potentially reallocate to value stocks.
See our indicative theme of Value Tech Stocks which includes relatively mature businesses that offer essential technology products and services and trade at reasonable valuations. Specifically, we have picked companies that are trading at a trailing price to earnings multiple of under 18x and have a market capitalization of over $10 billion. Key names in the theme include Oracle (ORCL) , VMware Inc (VMW), Seagate Technology (STX), Cisco (CSCO), and Intel (INTC).
[Updated 11/24/2020] Time To Double Down On Value Tech Stocks?
Value Tech Stocks such as Oracle (NYSE:ORCL) and Intel (NASDAQ:INTC) have had a mixed year. There was good reason for this, as the deep Covid-19 recession, abundant liquidity following interest rate cuts, and the growing at-home economy drove investors to hyper-growth software as service stocks, high-risk, high reward sectors such as electric vehicles, and fast-growing platform players such as Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN).
However, with the availability of multiple highly effective Covid-19 vaccines (Pfizer, Moderna, and AstraZeneca have published strong efficacy data on their vaccines) looking likely in 2021, things are likely to gradually start returning to normal. Moreover, the Fed could also eventually revisit its stance on ultra-low interest rates as the economy shows signs of picking up. As this plays out investors could re-visit lower growth stocks that represent compelling value. While positive news about the vaccine earlier this month has already buoyed cyclical sectors such as energy, industrials, and financials we think it’s likely that funds will flow to value tech stocks in the near-to-medium term.
Our indicative theme of Value Tech Stocks includes relatively mature businesses that offer essential technology products and services and trade at reasonable valuations. Specifically, we have picked companies that are trading at a trailing price to earnings multiple of under 18x and have a market capitalization of over $10 billion. Key names in the theme include Oracle (ORCL) , VMware Inc (VMW), Seagate Technology (STX), Cisco (CSCO), and Intel (INTC).
[Updated 11/10/2020] Can Intel Stock Recover?
Intel (NASDAQ:INTC) stock has had a rough year, driven by delays in the company’s transition to the next generation 7-nano meter technology for its chips, some recent headwinds at its cloud and data center business, and strong competition from rival AMD in the PC and server CPU space. The stock is down by about 25% this year, significantly underperforming the NASDAQ which is up by over 28%. That said, there have been some positive developments that could help the company get back on track. In October, Intel announced a deal to sell its NAND business to SK Hynix for about $9 billion in a move that could allow the company to focus on its core CPU business, while bolstering its liquidity. Intel also appears to be more flexible with its manufacturing, recently noting that it could produce its next-gen chips in-house, or outsource them, or even use a hybrid model that leverages both internal and external fabs. Intel stock looks like good value at the moment, trading at just about 9.5x projected 2020 earnings. While growth could remain tepid in the near-term, Intel’s scale, its vast marketing and distribution footprint, and its large base of corporate customers, who rely on Intel processors and are likely averse to switching, should help the company in the medium to long-term.
See our indicative theme on Value Tech Stocks for a complete list of technology companies – including Intel, NetApp, and Oracle – that look like good value at the moment. The theme has underperformed this year, remaining roughly flat year-to-date, versus the S&P 500 which is up by about 10%.
[Updated 9/3/2020] Value Tech Stocks
While high-growth information technology stocks have rallied sharply this year, with valuations looking increasingly stretched, we’ve picked a few stocks including Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO), and NetApp (NASDAQ:NTAP) that have relatively stable and mature businesses and still offer good value. Specifically, we have picked companies that are trading at a trailing price to earnings multiple of under 18x and have a market capitalization of over $10 billion. See our analysis Value Tech Stocks for more details on the returns and performance of these stocks. Parts of the analysis are summarized below.
Intel ($215 billion market cap, -15% YTD), the largest CPU vendor has been somewhat out of favor with investors on account of increasing competition from lower-cost ARM-based chipsets and the company’s delay in its rollout of its next-generation 7nm CPUs. However, Intel looks like good value considering its large base of existing customers, who rely on Intel processors and are likely averse to switch and also due to its vast marketing and distribution footprint. The stock trades at about 11x 2019 earnings.
Cisco ($178 billion market cap, -10% YTD), one of the largest network equipment providers, has also underperformed the market as it has struggled with top-line and bottom-line growth. However, the increasing digitization caused by the Covid-19 pandemic could drive demand for connectivity, in turn improving sales of Cisco’s networking software, and products such as switches and routers. The stock trades at about 16x FY’19 earnings.
NetApp ($10 billion market cap, -25% YTD) is a company that sells hardware and software focused on data management. While the company has seen a mixed performance this year due to weak demand from large customers and its significant reliance on hardware sales, it is looking to double down on the cloud computing market. Last month, NetApp closed a deal to acquire Spot, a leader in compute management, and cost optimization for public clouds. The stock currently trades at about 13x last fiscal year earnings.
So, these value technology stocks might give stable returns from current levels. But, what if you’re looking for a more balanced portfolio instead? Here’s a top-quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.
While Snowflake offers high growth, we think it comes with considerable risk at current prices. What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 120% return since 2016, versus about 60% for the S&P 500. Comprising companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.