Why Is Cisco’s Stock Up 75% In The Last 3 Years Despite Weak Revenue Growth?

by Trefis Team
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Cisco stock (NASDAQ: CSCO) has gained a whopping 75% since the beginning of 2017 despite its revenues increasing by just about 8% during the same period. So what really happened? Investors didn’t really change their perspective of Cisco’s future growth, which is probably the reason why the P/E ratio largely remained unchanged. However, steady margin improvement coupled with the small revenue growth provided an upward boost to the company’s stock price. In addition to that, the role of share repurchases – which resulted in a 12% decline in share count – cannot be ignored.

Our dashboard ‘Why Is There A Mismatch In The Rate At Which Cisco’s Revenues And Stock Price Have Changed? summarizes key factors that drove Cisco’s stock over the past 3 years.

What Factors Have Contributed To An Upward Trend In Cisco’s Stock?

[A] Improvement In Profitability

  • Between 2017 and 2019, Cisco’s EPS (earnings per share) jumped from $1.92 to $2.63, implying an increase of 37%.
  • While revenue increased 8%, net income margin increased by 12% and the share count decreased by 12%. It is clearly evident that Cisco’s stock price growth has been driven by margin improvement and share count reduction.
  • The margin improvement was driven by positive operating leverage (operating expenses as % of revenue), which saw Cisco’s operating margin improve from less than 25% in 2017 to around 27.5% in 2019.
  • Cisco’s transition towards a software-focused business model is the primary reason for this improvement. The company’s focus to sell more software and subscription-based offerings which have a higher margin than its traditional hardware product offerings is helping Cisco generate more profits.
  • This, in part, also helped sustain the P/E ratio despite slow topline growth.

[B] Stock Buyback Reduced Outstanding Share Count

  • Cisco has spent a massive $42 billion to repurchase shares over 2017-2019 – resulting in a 12% reduction in Cisco’s share count over the same time period.
  • Notably, Cisco has accelerated share repurchase in the last couple of years, with the company spending more than $38 billion over 2018-2019.
  • Cisco has about $27 billion in cash and cash equivalents as of the last report, and the company will very likely continue to buy back shares as it still has around $11 billion remaining under its share repurchase program.
  • Cisco’s strong cash flow position coupled with its strong cash conversion ability gives the company considerable leeway in its capital allocation strategy. Therefore, we believe the company will continue to make repurchases in the future, albeit at a slower pace – supporting Cisco’s stock price growth.

 

While Cisco stock witnessed strong growth of 75%, here is another company that managed roughly half this growth figure. Find out why Oracle’s stock price grew 45% over the same period despite revenue growth comparable to Cisco’s.

 

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