Cybersecurity is giving investors a new reason to look at an old tech giant, Cisco Systems Inc.
Cisco was one of several stocks that jumped Monday following a malware attack dubbed WannaCry that has affected more than 150 countries. It might seem odd to lump Cisco together with cybersecurity stocks as it is known for selling networking gear. But Cisco's security business, growing at a double-digit rate, is one of its few bright spots.
Expect more good news when the tech giant reports earnings on Wednesday.
Granted, Cisco's fiscal third-quarter results probably won't be great overall. Analysts polled by FactSet forecast earnings for the period that ended in April of 58 cents a share, up a penny from a year earlier. Revenue is expected to have slipped 0.8% to $11.9 billion, which would be a sixth straight quarterly decline.
But security, the key segment to watch, is garnering more attention as growth stagnates in Cisco's larger, more-established segments. For example, networking, responsible for 83% of revenue when the tech bubble peaked in 2000, is at just 45% today. Security is still small on a relative basis, generating about $2 billion in annual revenue, or about 4% of Cisco's total. But that still makes Cisco one of the biggest security vendors in the world.
Analysts say its exposure could increase if the Trump administration implements a repatriation tax holiday that would free up some of Cisco's offshore cash stockpile. Some $62 billion of Cisco's $72 billion in cash and cash equivalents is held overseas. To put that in perspective, Cisco's offshore cash as a percentage of its market capitalization is 36%, even greater than Apple Inc.'s 28%.
Unlocking some of that money could help Cisco further diversify. Its $3.7 billion acquisition of AppDynamics earlier this year was its largest in five years. Analysts at Credit Suisse say a repatriation holiday may help Cisco transition away from networking, boost growth and make its revenue stream more recurring. They highlighted Palo Alto Networks Inc., a fast-growing security company, as well as Splunk Inc. and ServiceNow Inc. as three top potential acquisition targets.
Cisco has a decent track record in deal-making, too, having acquired Sourcefire in 2013, a deal that helped juice growth in its security business.
Cisco shares have been perennial underperformers, lagging behind the Nasdaq Composite Index over the past one, three, five and 10 years. But, as Monday's security-inspired trading showed, that could change if the market starts valuing Cisco more as a cybersecurity firm. Shares trade at 14 times projected earnings over the next 12 months. By comparison, Splunk, ServiceNow and Palo Alto Networks all command valuations many times higher. None of those firms pays a dividend, while Cisco's shares yield 3.2%.
It is about time for investors to reconnect with this tech stalwart.
Write to Steven Russolillo at firstname.lastname@example.org
(END) Dow Jones Newswires
May 17, 2017 02:47 ET (06:47 GMT)