Is Cisco Systems, Inc. Stock a Buy?

By Markets Fool.com

Generally, announcing revenue and earnings that beat both internal and external forecasts is a reason for shareholders to celebrate an inevitable stock price pop. Unfortunately for Cisco fans, reporting strong quarterly results -- for the second time in a row -- has had little to no impact on the company's stock price.

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While it's easy to see why naysayers continue to doubt Cisco, many of the concerns surrounding its relatively stagnant growth are short-term in nature. And that should be music to the ears of long-term investors, particularly those in search of both stock price appreciation and one of the tech industry's best dividend yields.

What's not to like?
Leading up to Cisco's Q3 earnings report, analysts were calling for about 4.5% top-line growth, along with earnings per share (EPS) of $0.53 on a non-GAAP basis (excluding one-time items), up from $0.51 a year earlier. Both results would have been considered a win by most, particularly following Cisco's outstanding Q2 performance.

Turns out longtime CEO John Chambers' swansong -- this was his last quarter as CEO as he makes way for longtime Cisco exec Chuck Robbins -- was slightly better than expected. Cisco reported $12.1 billion in revenue, a 5.1% improvement over last year, and non-GAAP EPS of $0.54. Perhaps even more impressively, Cisco's GAAP EPS was $0.47, demonstrating that its expense management initiatives are beginning to pay off.

But based on Cisco's stagnant stock price, investors were clearly hoping for more. And Chambers' guidance for fiscal Q4 of 1%-3% revenue growth and non-GAAP earnings of "just" $0.57 a share didn't placate the naysayers. And therein lies the opportunity.

Look to next year, not next month
Like its new partner Microsoft , Cisco is in the midst of a major transition to cutting-edge technologies. This includes cloud services -- a key component of Cisco's strategic alliance with Microsoft and its Azure platform -- the Internet of Everything (or IoE, as Chambers calls it), security, and mobile.

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However, unlike Microsoft, Cisco's strong performance in the aforementioned areas hasn't translated to stock appreciation. Microsoft's stock is up about 9% since announcing earnings last month, in large part due to its strong performance in cloud-related sales. Revenue from Cisco's data center business, a key component of its own cloud strategy, were up a whopping 21% last quarter and are now tracking at more than $3 billion annually. Which elicited little more than a yawn.

Security is also a primary concern of prospective cloud customers. Cisco's security revenue jumped 14% last quarter, thanks to a "record number of licenses." Another objective was to increase Cisco's recurring revenue streams, and it's working. Recurring revenue, which doesn't require the expense associated with new sales, was up 20%. As for mobile, Cisco's cloud managed platform solution helped drive a 9% improvement in unit sales.

But wait, there's more
Cisco announced a deal to integrate its solutions into smart cars, it opened yet another Innovation Center -- bringing the total to eight worldwide -- to advance its IoE objectives, and it introduced a new suite of smart city solutions called Connected Roadways that allows disparate systems to "talk" to each other, improving traffic flow and increasing safety.

Conservative estimates suggest that smart cities are poised to become a more than $1 trillion market in 2019, and Cisco is leading the way.

In addition to its many long-term growth prospects, Cisco boasts an outstanding balance sheet, with over $54 billion in cash and equivalents, over $2 billion more than last year. It's safe to say that Cisco's nearly 3% dividend yield isn't likely to disappear any time soon.

Finally, Cisco grew revenue by nearly $600 million compared to the prior year, but expenses only grew by about $200 million. As Chambers pointed out, Cisco's expense management initiative has only been in place for eight months.

Cisco is well-positioned for when "the world becomes digital," and the potential is enormous. But a transformation of that magnitude doesn't happen overnight, which is why Cisco's stock has yet to catch fire. However, that's great news for investors in search of an outstanding growth and income alternative who can look to next year and beyond.

The article Is Cisco Systems, Inc. Stock a Buy? 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.