Better Buy: Cisco Systems Inc. or Oracle Corporation?
Cisco (NASDAQ: CSCO) and Oracle (NYSE: ORCL) are often considered dusty "old tech" stocks that are owned for income instead of growth. But with the market hovering near historic highs, both stocks might appeal to investors looking for more conservative plays that can weather the eventual downturn. But is one of these plays better than the other? Let's compare these companies' core strengths and weaknesses to decide.
Image source: Getty Images.
Cisco's strengths and weaknesses
Last year, nearly half of Cisco's revenue came from sales of routers and switches. Both are slow-growth businesses -- router sales fell 4% last year as switching sales stayed flat. Both businesses face three major headwinds: sluggish enterprise spending, competition from cheaper rivals like Huawei, and the rise of cloud-based networking solutions reducing the need for traditional routers and switches.
To diversify away from those two businesses, Cisco has aggressively expanded into higher-growth markets like cybersecurity and service provider video. However, its double-digit growth in those two markets isn't significantly boosting itsoverall revenue, which is expected to rise just 1% this year. Earnings, boosted by buybacks, are expected to rise 3%.
Oracle's strengths and weaknesses
Oracle's core businesses of database and hardware are also slow-growth ones. Both businesses face similar headwinds as Cisco -- weak enterprise spending, macro headwinds, and a market shift toward more scalable cloud-based services.
In response, Oracle has been pivoting its aging businesses toward cloud-as-a-service platforms. Last quarter, Oracle's combined cloud and on-premise software revenues, which accounted fornearly 80% of its top line, rose 5% annually to $6.8 billion. Total cloud revenues, which include its SaaS (software as a service), PaaS (platform as a service), and IaaS (infrastructure as a service) platforms, rose 59% to $969 million. But like Cisco, that double-digit growth isn't significantly boosting its total revenue or earnings, which are respectively expected to climb about 1.5% and 1% this year.
Which stock is fundamentally cheaper?
Cisco currently trades at 14 times earnings, which is much lower than the industry average of 25 for networking equipment makers. Oracle has a P/E of 18, which is also a discount to the average P/E of 54 for the application software industry. Both stocks also trade at a discount to the S&P 500's current P/E of 25.
Looking ahead, analysts expect Cisco to grow its earnings by 9% annually over the next five years. That estimate gives it a 5-year PEG (price to earnings growth) ratio of 1.3. Oracle's earnings are expected to rise about 8% per year during that same period, giving it a 5-year PEG ratio of 1.9. Since a PEG ratio under 1 is considered "cheap," neither Cisco nor Oracle look undervalued relative to their earnings growth potential -- but Cisco looks cheaper.
Dividends and buybacks
Cisco has hiked its dividend annually for five consecutive years, while Oracle has done the same for four. However, Cisco's forward yield of 3.5% is much higher than Oracle's 1.6% yield. Over the past 12 months, Cisco spent 38% of its free cash flow in dividends, while Oracle spent 20%. This indicates that Oracle has more room to raise its dividend, yet it pays a lower yield than Cisco.
However, Oracle favors buybacks over dividends -- it spent 65% of its FCF on buybacks over the past 12 months, while Cisco only spent 22%. Cisco's more conservative use of its FCF on dividends and buybacks gives it more cash to pursue big acquisitions. Both companies are heavily focused on inorganic growth -- Cisco acquired (or announced plans to acquire) 11 companies overthe past 12 months, while Oracle acquired nine smaller players.
The winner: Cisco
Cisco isn't an exciting stock, but its lower valuation, higher dividend, and preference for using its FCF on dividends and acquisitions instead of buybacks makes it a better long-term play in my book. Oracle isn't a terrible investment, but plenty of other "mature tech" companies have better upcoming catalysts and higher dividends.
A secret billion-dollar stock opportunity The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early, in-the-know investors! To be one of them, just click here.
Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of Oracle. 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.