Cisco Systems (CSCO) designs, manufactures, and sells Internet Protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products. On the other hand, Avaya Holdings Corp. (AVYA) provides digital communications products, solutions, and services for businesses worldwide. The company operates in two segments, Products & Solutions and Services.
Since the onset of the COVID-19 pandemic, cloud communications have been in high demand as the need for remote working has increased, with people spending most of their time indoors. While the semiconductor chip shortage exacerbated by the Russia-Ukraine war remains a concern, cloud communications are expected to keep witnessing increasing demand in the current 5G connectivity and the internet of things (IoT) era. According to a Market Research Future report, the global cloud communication platform market is expected to grow at a CAGR of 14.1% from 2022 to 2028. As a result, both CSCO and AVYA should benefit.
But which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On June 6, 2022, CSCO announced that its Board of Directors had declared a quarterly cash dividend of $0.38 per common share to be paid on July 27, 2022, to all stockholders of record as of the close of business on July 6, 2022.
On May 13, 2022, AVYA and Microsoft Corp. (MSFT) expanded their global partnership by pairing the industry-leading Avaya OneCloud portfolio with Microsoft Azure to provide organizations with more options to increase their productivity and customer engagement with unrivaled reliability, agility, and scale. David Austin, Senior Vice President, Strategy and Alliances, AVYA, said, "Our strategic partnership with Microsoft is an important milestone in our continued transformation to a cloud business model."
Recent Financial Results
CSCO’s net revenue came in flat at $12.80 billion for the fiscal third quarter ended April 30, 2022. The company’s non-GAAP operating income grew 4% year-over-year to $4.50 billion, while its non-GAAP net income came in at $3.60 billion, representing a 3% year-over-year increase. Also, its non-GAAP EPS came in at $0.87, up 5% year-over-year.
AVYA’s revenue decreased 2% year-over-year to $716 million for the fiscal second quarter ended March 31, 2022. Its non-GAAP operating income declined 22.3% year-over-year to $115 million. Its non-GAAP net income fell 29.2% year-over-year to $51 million. Also, its non-GAAP EPS came in at $0.53, down 28.4% year-over-year.
Past and Expected Financial Performance
CSCO’s revenue grew at a CAGR of 0.2% over the past three years. Analysts expect CSCO’s revenue to increase 2.7% in the current year and 3.5% next year. The company’s EPS is expected to grow 4% in the current year and 6% next year. Moreover, its EPS is expected to grow at 6.5% per annum over the next five years.
On the other hand, AVYA’s revenue grew at a CAGR of 0.5% over the past three years. The company’s revenue is expected to decrease 4.4% in the current year but increase 1.9% next year. Its EPS is expected to grow 33.2% in the current year but decline 12.8% next year. Also, AVYA’s EPS is expected to grow at 4.3% per annum over the next five years.
Profitability
CSCO’s trailing-12-month revenue is 17.66 times what AVYA generates. CSCO is also relatively more profitable, with a gross profit margin and EBITDA margin of 63.14% and 31.16% compared to AVYA’s 59.09% and 13.01%, respectively
Furthermore, CSCO’s ROA and ROTC of 9.50% and 17.11% are higher than AVYA’s 1.58% and 2.68%, respectively.
Valuation
In terms of forward non-GAAP P/E, CSCO is currently trading at 12.96x, 491.8% higher than AVYA’s 2.19x. Moreover, CSCO’s forward EV/EBITDA of 8.80x is 59.7% higher than AVYA’s 5.51x.
So, AVYA is the more affordable stock.
POWR Ratings
CSCO has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, AVYA has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
CSCO has a grade of A for Quality. This is justified given CSCO's 17.11% trailing-12-month ROTC, which is 262.7% higher than the industry average of 4.72%. On the other hand, AVYA has a Quality grade of C in sync with its 2.68% trailing-12-month ROTC, 43.2% lower than the industry average of 4.72%.
Of the 54 stocks in the Technology - Communication/Networking industry, CSCO is ranked #10. However, AVYA is ranked #45.
Beyond what I’ve stated above, we have also rated the stocks for Stability, Sentiment, Growth, Value, and Momentum. Click here to view all the CSCO ratings. Also, get all the AVYA ratings here.
The Winner
The cloud communications market is expected to grow exponentially with the continuation of hybrid working. While both CSCO and AVYA are expected to gain in the long run, it is better to bet on CSCO now because of its robust financials, better growth prospects, and higher profitability.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology - Communication/Networking industry here.
CSCO shares were trading at $43.39 per share on Monday afternoon, down $0.10 (-0.23%). Year-to-date, CSCO has declined -30.65%, versus a -19.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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