In this article, I evaluated two tech stocks, BlackBerry Limited (BB) and Cisco Systems, Inc. (CSCO), to determine which has the potential for better returns. We believe CSCO is the better investment for reasons explained throughout this piece.
In recent years, several industries, including telecom, manufacturing, transportation, healthcare, financial services, retail, and education, have rapidly moved toward digital transformation. The adoption of digital products and solutions in individual organizations has dramatically changed business models and structures across a wide range of sectors.
As per Statista, global spending on digital transformation will hit an all-time high of $3.40 trillion by 2026, with digitally transformed organizations contributing more than half of the global GDP.
Given growing digitalization across multiple industries, tech spending will likely remain robust in the upcoming years. According to the latest forecast by Gartner, Inc., global IT spending is anticipated to reach $5.10 trillion in 2024, an increase of 8% from 2023. Moreover, Gartner forecasts worldwide spending on communications services to total $1.50 trillion, up 3.3% from 2023.
The landscape of enterprise networking is swiftly evolving, propelled by numerous technological advancements and changing business needs. In an era marked by digital transformation and a rapid surge in connected devices, the enterprise networking industry plays a vital enabler for organizations looking to optimize their operations, improve communication, and grab new opportunities.
IMARC Group expects the global enterprise networking market to reach $80.70 billion by 2028, growing at a CAGR of 5.8% during the forecast period (2023-2028). With the widespread adoption of technologies like AI, the Internet of Things (IoT), and Machine Learning (ML), there is a high demand for advanced communication/networking infrastructure, driving the market growth.
Further, emerging trends of enterprise mobility and the rising adoption of bring-your-own-device (BYOD) and hybrid & remote work will present lucrative growth opportunities for the networking market.
Therefore, tech stocks BB and CSCO will likely benefit from the industry’s bright growth prospects.
BB has gained 5.6% over the past month, while CSCO plunged 9.6%. However, BB has slumped 25.6% over the past six months, compared to CSCO’s 4.2% decline. Also, BB lost 24% over the past year, while CSCO fell 3.6%.
But here are the reasons why we think CSCO could perform better in the near term:
Latest Developments
On November 20, BB and the Government of Malaysia announced a long-term software and services agreement to strengthen Malaysia’s cybersecurity posture. This deal will enable the Malaysian Government to leverage the full suite of trusted BlackBerry® cybersecurity solutions.
Also, BB announced that it will establish a world-class Cybersecurity Center of Excellence (CCoE) in Kuala Lumpur in 2024. The CCoE will enhance intelligence sharing between nations and extend BlackBerry’s global threat intelligence network.
On December 6, CSCO introduced the Cisco AI Assistant for Security. The AI Assistant will enable customers to make informed decisions, augment their tool capabilities, and automate complex tasks. This new launch marks a significant step in making AI pervasive in the Security Cloud, Cisco’s unified, AI-driven, cross-domain security platform.
“To be an AI-first company, you must be a data-first company. With our extensive native telemetry, Cisco is uniquely positioned to deliver cybersecurity solutions that allow businesses to confidently operate at machine scale, augmenting what humans can do alone,” said Jeetu Patel, Executive Vice President and General Manager of Security and Collaboration at CSCO.
Recent Financial Results
For the fiscal 2024 second quarter that ended August 31, 2023, BB’s revenue decreased 21.4% year-over-year to $132 million. The company reported an operating loss and a loss before income taxes of $47 million and $40 million, respectively. Also, its net loss came in at $42 million, or $0.07 per share, respectively.
CSCO’s revenue increased 7.6% year-over-year to $14.67 billion during the fiscal 2024 first quarter that ended October 28, 2023. Its operating income grew 20.8% from the year-ago value to $4.28 billion. The company’s net income came in at $3.64 billion, or $0.89 per share, compared to $2.67 billion, or $0.65 per share a year ago, respectively.
Past And Expected Financial Performance
Over the past three years, BB’s revenue has decreased at a CAGR of 6.6%. The company’s tangible book value and total assets have declined at CAGRs of 39% and 20.2% over the same time frame, respectively.
Analysts expect BB’s revenue for the fiscal 2024 third quarter (ended November 2023) to increase 7% year-over-year to $180.90 million. However, the company is expected to report a loss per share of $0.02 for the same period. For the fiscal year ending February 2025, BB’s revenue and EPS are expected to decline 14% and 57.4% year-over-year to $762.36 million and $0.01, respectively.
CSCO’s revenue and EBITDA have grown at CAGRs of 6.5% and 5.9% over the past three years, respectively. Its net income and EPS have improved at respective CAGRs of 9.1% and 10.3% over the same timeframe. Also, the company’s levered free cash flow has increased at a CAGR of 8.4% over the same period.
For the fiscal year ending July 2025, CSCO’s revenue is expected to increase 3.6% year-over-year to $56.56 billion. Likewise, analysts expect the company’s EPS for the next year to grow 4.4% from the prior year to $4.06.
Profitability
CSCO’s trailing-12-month revenue is 70.3 times what BB generates. Moreover, CSCO is more profitable, with a trailing-12-month gross profit margin of 63.69% compared to BB’s 57.33%. CSCO’s trailing-12-month EBIT margin and net income margin of 28.39% and 23.40% compared to BB’s negative 16.12% and negative 66.91%, respectively.
Additionally, CSCO’s trailing-12-month levered FCF margin of 28.16% compared with BB’s negative 10.05%. Also, CSCO’s trailing-12-month ROE, ROA, and ROTC of 31.78%, 13.91%, and 19.78% compared to BB’s negative 51.13%, negative 7.43%, and negative 5.28%, respectively.
Valuation
In terms of non-GAAP P/E (FY1), CSCO is currently trading at 12.37x, 94.7% lower than BB, which is trading at 231.27x. CSCO’s forward EV/EBITDA of 8.98x is significantly lower than BB’s 69.05x.
However, CSCO’s trailing-12-month Price/Sales and Price to Book multiples of 3.38 and 4.30 are higher than BB’s 2.74 and 2.74, respectively.
POWR Ratings
BB has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, CSCO has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BB has a D grade for Quality, in sync with lower profitability relative to its peers. BB’s trailing-12-month EBIT margin and net income margin of negative 16.12% and negative 66.91% compared to the respective industry averages of 4.69% and 2.20%.
On the contrary, CSCO has an A grade for Quality, justified by its higher-than-industry profitability. The stock’s trailing-12-month EBIT margin and net income margin of 28.39% and 23.40% are significantly higher than the industry averages of 4.69% and 2.20%, respectively.
In addition, BB has a D grade for Stability, consistent with its 24-month beta of 1.95. On the other hand, CSCO has a B grade for Stability, justified by its 24-month beta of 0.76.
Of the 46 stocks in the Technology - Communication/Networking industry, BB is ranked #41, while CSCO is ranked #6.
Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Sentiment, and Growth. Click here to view BB Ratings. Get all CSCO ratings here.
The Winner
Demand for communication and networking infrastructure and systems is expected to grow significantly, driven by the adoption of wireless devices amid rapid digitalization globally, the growing usage of innovative technologies like AI, IoT, and ML, and rising trends of enterprise mobility and remote work, presenting numerous growth opportunities for tech companies.
Given the industry’s rosy prospects, tech stocks BB and CSCO are well-positioned to grow considerably. However, BB’s relatively deteriorating financials, low profitability, and weak growth prospects make its competitor, CSCO, the better tech stock pick in December.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology - Communication/Networking industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CSCO shares rose $0.08 (+0.17%) in premarket trading Wednesday. Year-to-date, CSCO has gained 3.69%, versus a 20.72% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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