3 Reasons Cisco Systems, Inc. Stock Could Rise

You wouldn't know it from investors' reactions following Cisco's fiscal 2015 Q3 earnings report on Wed, May 13, but there was a lot to like -- just like its second quarter results. Alas, Cisco stock remains stuck in neutral, and even a strong quarter can't seem to convince investors to buy in. What's a networking giant to do?

For departing CEO John Chambers, the answer is simple: reinforce that Cisco has a definite plan in place, and that it intends to execute on that plan. In fact, in many ways it already is executing. That said, there are several areas to focus on as Cisco moves forward with new CEO Chuck Robbins. Here are a few of the key drivers that could lead Cisco shares higher.

A quick recapFrom both a revenue and earnings-per-share (EPS) perspective, Cisco beat its own and consensus analyst estimates in Q3. On the revenue front, Cisco generated an impressive $12.1 billion for the quarter, up 5.1% from a year-ago. Both Cisco and the Street were forecasting around 4%-5% sales growth.

As for EPS -- this is where things get pleasantly interesting. On a GAAP basis (including one-time items) Cisco reported a stellar $0.47 a share, up nearly 12% over last year. Which begs the question: how did Cisco improve its per-share earnings so dramatically, after reporting "just" 5.1% revenue growth? The answer is one of the reasons Cisco stock could rise in the months and years ahead.

Lean, mean IT machineDespite continuing to grow its top line, Cisco's cost of sales and total operating expenses have barely budged compared to a year ago. Cost of sales rose a meager $73 million in Q3, while total operating expenses increased $136 million, all while revenue grew by nearly $600 million compared to fiscal 2014's Q3. Cisco's focus on growing recurring revenue streams -- the 20% jump in on-going sales from its Collaboration unit is an ideal example -- helped improve its gross margin, and should continue to do so going forward.

What makes Cisco's efficient operations even more impressive -- and something Chambers made sure to note on the conference call -- was that it didn't buckle down and get serious about cost-control until about eight months ago.

A digital worldCisco's primary objective is to position itself as the provider of choice as "the world becomes digital" -- a phrase used by Chambers on several occasions. A digital world requires comprehensive security protocols and solutions and data centers to collate and utilize reams of information collected from the Internet of Everything (as the company calls the Internet of Things), all hosted in the cloud. Cisco is already making headway in these key areas, and positioning itself for further growth.

Data center revenue was up a whopping 21% in Cisco's Q3, reaching an annual run-rate of over $3 billion: results that almost can't be over-emphasized. Why? As Cisco's new strategic alliance with Microsoft demonstrates, the exploding cloud market won't just benefit software and hosting providers. The cloud will require more, and more powerful, data centers. That's what makes Cisco's alignment with Microsoft and its Azure cloud platform so intriguing, and should help drive its stellar data center performance long into the future.

Cloud and IoE-related security is another high-growth opportunity, as evidenced by Cisco's 14% revenue improvement over last year, and its "record number of licenses." Cisco is also making strides in its smart city efforts, opening two more "IoE Innovation Centers" last quarter, one in Berlin and one in Australia. Cisco's vision of a "digital world" is coming into focus, and could help drive its stock price higher.

The upside to being unpopularThe current malaise surrounding Cisco's stock price could very well be a relatively short-term situation. Cisco's impressive cost-cutting initiatives and seemingly instantaneous results, as well as its foundation for future growth in a digitized world via IoE, security, and data centers -- among other factors -- are important, long-term growth drivers. When investors opt to focus on these aspects of the Cisco story, it could be the impetus for a rise in its stock price.

In the meantime, after two quarters of financial wins yet little stock price movement, Cisco may be a value stock waiting to take off. How long until investors and industry pundits recognize that Cisco is preparing for next year, not next month? It's impossible to tell -- but when they do, Cisco's stock could really pop.

The article 3 Reasons Cisco Systems, Inc. Stock Could Rise originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.