Here’s Why Cisco Technology Stock Is Not Your Best Internet Infrastructure Bet

AKAM: Akamai logo

We think that Akamai Technologies (NASDAQ:AKAM) currently is a better pick compared to Cisco Systems (NASDAQ:CSCO). Akamai stock trades at about 5.2x trailing revenues, only slightly higher than Cisco, whose P/S multiple stands at 4.7x. Does this gap in the companies’ valuations make sense? We believe this gap should widen further. While AKAM has benefited from the pandemic, Cisco has seen a drop in demand for its networking products. Cisco’s revenue has dropped from $51.9 billion in FY ’19 to $49.8 billion in FY ’21, as product revenue slipped from $39 billion to $36 billion over this period (Cisco’s fiscal year ends in July). Meanwhile, Akamai’s revenues have risen from $2.9 billion in FY ’19 to $3.3 billion on an LTM basis, driven by a rise in security technology product demand. This mismatch is revenue growth also reflects in EBIT margin growth. While Cisco’s margins dropped from 29.9% in FY ’19 to 26.3% in FY ’21, Akamai’s margins rose from 19% in FY ’19 to 20.9% on an LTM basis.

However, there is more to the comparison, which makes AKAM a better bet than CSCO even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Akamai vs Cisco: Sector Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Akamai Is The Clear Winner On Revenue Growth

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While Cisco’s revenues have struggled due to a drop in product demand, Akamai has seen steady revenue growth over the past four years. Akamai’s revenues rose from $2.5 billion in FY ’17 to $3.3 billion on an LTM basis, an increase of 32%, while Cisco has seen a growth of just under 4% over this period, with revenues rising from $48 billion in FY ’17 to $49.8 billion in its recently reported FY ’21.

While Cisco is a much larger company, with 15x the revenue of Akamai, the latter has seen its revenues grow 8x faster since FY ’17.

2. Akamai Better Than Cisco On Margin Growth As Well

While Cisco’s margins have almost consistently dropped from 28% in FY ’17 to 26.3% in FY ’21, Akamai’s EBIT margins have jumped strongly from 12.6% in FY ’17 to 20.9% on an LTM basis. Despite Akamai’s margins coming in lower than Cisco, Akamai’s higher valuations make sense given its faster revenue and margin growth.

3. Net Cash Position A Mixed Bag

Akamai’s debt-to-equity ratio currently stands at 11%, more than double that of Cisco’s 5%. However, Akamai’s debt-to-equity ratio by itself isn’t all that bad, given that the company is still in a growth phase. On the plus side, Akamai’s cash as a % of assets stand higher at 32.6%, in comparison to Cisco’s 25.1%.

The Net of It All

While Cisco’s revenues and margins are larger than that of Akamai, the latter has seen significantly stronger growth in revenues and operating margins compared to Cisco. Looking at the post-Covid recovery, Akamai has fared far better, with LTM revenues more than 14% higher than the pre-Covid fiscal year (FY 2019), while Cisco’s LTM revenues stand at roughly the same level as those in FY 2019. While Akamai has a higher P/EBIT ratio of 25x vs Cisco’s 18x, and a higher P/S ratio at 5.2x vs Cisco’s 4.7x, Akamai has the potential to continue on its run, supported by strong financials. We think this gap in valuation could further widen over time. As such, we believe that Akamai is currently a better buying opportunity compared to Cisco stock.

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