Better Buy: Cisco Systems, Inc. vs. IBM

By Markets Fool.com

Image source: Getty.

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Though it's never pleasant for the employees impacted by job reductions, Cisco (NASDAQ: CSCO) CEO Chuck Robbins' recent decision to cut 5,500 positions -- equal to about 7% of its global workforce -- was a necessary evil. Pundits and investors appear to have gotten on board with the decision, as well they should since it will direct new resources to fast-growing markets.

IBM (NYSE: IBM) announced as many as 14,000 jobs will be cut this year as it, too, continues its shift to CEO Ginni Rometty's strategic imperatives including the cloud, security, cognitive computing-driven analytics, and big data. The good news for investors of both Cisco and IBM is that while they have each enjoyed a 16% jump in share price in 2016, they both still offer significant upside.

Which is the better buy? Not an easy question, and for all the right reasons: Both offer significant growth potential along with two of the highest dividend yields in tech.

Image source: Cisco.

The case for Cisco

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Excluding its now divested SP Video CPE Business, Cisco was able to grow revenue year over year by 2% to $12.6 billion. What makes Cisco's results so impressive is that it was able to accomplish the slight revenue bump even as it continues its shift away from legacy switching and router businesses.

Switching made up 30% of Cisco's revenue last quarter, down from last year's nearly 32% after adjusting for its SP Video unit. Switches aren't likely to drop as dramatically as routers relative to total sales thanks to Robbins and team's focus on data center switches: a huge opportunity as businesses shift data to the cloud.

As for routing, it equaled 17% of sales in the year-ago quarter: That piece of Cisco's revenue pie is now down to 15%. And keep in mind Robbins has only been at the helm since July of last year, so his impact on Cisco's results is just now being felt. Look for Cisco's reliance on traditional switches and routers to continue declining compared to total sales as Robbins' transformation progresses.

Another emphasis of Cisco's is its push for a subscription-based software model. The upside to software is pretty clear: It's a necessity in a world moving to the cloud and the Internet of Things (IoT), and it generates a base of recurring revenue thanks to licensing. Last fiscal year's 8% jump in total deferred sales to $16.5 billion was led by its 33% increase in software and subscriptions.

Image source: IBM.

The case for IBM

Thankfully for IBM shareholders, analysts have finally started to realize its quarter-by-quarter results aren't measured by total revenue alone. Like Cisco, IBM CEO Ginni Rometty is still in the midst of a years-long transformation away from old-school enterprise and hardware sales to the aforementioned strategic imperatives.

Based on last quarter's results, and the corresponding response from investors, IBM has turned the proverbial corner. Revenue dropped 3% to $20.2 billion, and GAAP (including one-time items) per-share earnings also sank, down 27% to $2.61. However, the reason for the earnings-per-share (EPS) decline was largely due to IBM sinking over $5 billion on 11 acquisitions this year. Investing in crucial areas including the cloud, big data, and analytics will continue as IBM bolsters its strategic imperatives, and it's already working.

IBM's cloud sales are tracking at an annual run-rate of $11.6 billion, a staggering figure that continues to climb and positions IBM as an industry leader. Just as importantly, in the last 12 months, IBM's cloud services revenue -- a market expected to generate a whopping $204 billion in revenue this year -- climbed more than 50% in Q2 to $6.7 billion.

Deciding between Cisco and IBM is a "flip-a-coin" decision as both are positioned for growth in some of the fastest-growing markets in tech. However, IBM's leadership in the cloud, and its analytics solutions providing customers with actionable results from all that data, gives it the slight edge. Long-term growth and income investors -- Cisco boasts a 3.3% dividend, and IBM 3.5% -- won't go wrong with either.

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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.