For a boring company like Cisco Systems (NASDAQ:CSCO), it enjoyed a solid performance in 2019. Last year, Cisco stock returned nearly 17% for stakeholders. Granted, it’s not an earth-shattering figure. As a telecommunications equipment specialist, Cisco isn’t exactly a sexy organization. However, it’s a name you may want to keep in the backburner.
Before I get into the bullish argument for Cisco stock, let me acknowledge the reservations many investors have. To start off, some folks are skeptical of the underlying company’s growth narrative. As an example, Cisco generated top-line sales of $13.2 billion in the most recent quarter ending Oct. 31, 2019. That represented only a modest 0.7% lift from the year-ago quarter.
Now, no one is suggesting that Cisco stock is a growth monster. But without an overriding catalyst, it’s hard to get the markets excited about the networking giant. That’s probably one of the reasons that led to the rather choppy trading in shares last year.
Back in mid-July 2019, Cisco was up 40% for the year. But quickly thereafter, shares tumbled. The volatility continued when management reported its results for its fiscal fourth quarter of 2019. Although the company beat on both the top and bottom lines, it disclosed disappointing guidance for fiscal Q1 2020.
With the see-sawing price action of Cisco stock, several investors elected to stay on the sidelines. While it’s difficult to imagine a blue-chip powerhouse like Cisco tanking completely, market gains have been hard to come by. In other words, better alternative investments existed in this space and others.
Be that as it may, the broader 5G rollout provides a distinctly lucrative opportunity for the telecom-equipment provider.
Cisco Stock May Own the Keys to 5G
Ask a random person on the street what 5G means and you’ll probably get the answer of faster wireless speeds. While that’s certainly a major component of this next-generation telecommunications technology, not too many people may appreciate the complex path toward structural realization.
Put another way, 5G isn’t just a switch that telecoms pull – voila! Faster wireless speeds! Instead, it’s a multifaceted journey with myriad cogs that must work in sync to realize its true potential. Here, Cisco provides a critical pathway to enabling both mobile carriers and customers the full benefits of 5G. Thus, Cisco’s general manager of service provider networking, Jonathan Davidson, boldly claimed that the company “is the most important 5G vendor in the world.”
One area where Cisco is undoubtedly crucial is in the 5G backhaul. Essentially, a backhaul in telecommunications is the intermediary link between a core network and the group of localized subnetworks standing at the main network’s edge.
Currently, the challenge for the telecom industry is that today’s backhaul is geared toward past technology. Davidson bluntly stated that much of the present backhaul in the U.S. is operating as “a really low capacity network.”
Long story short, without an upgraded backhaul, the 5G rollout will hit a technical backlog.
But it’s not just the backhaul narrative that bolsters the case for Cisco stock. The underlying organization also aims to help mobile carriers upgrade their core networks to fully advantage 5G’s potential. To that end, Cisco has gained substantial credibility by partnering with Japanese firm Rakuten (OTCMKTS:RKUNY) to build out its 5G network, along with its virtualized telco cloud.
It’s quite possible that the markets aren’t pricing in the longer-term implications for Cisco’s 5G opportunities. Therefore, you can get in before the bullish wave hits.
Boring Is Good, Especially Right Now
Even with Cisco’s 5G thesis, the company’s boring reputation will be hard to shake. Still, I think this is actually a benefit, especially in the current market environment.
Let’s face it: with the broader bull market heading toward its eleventh year, it’s on the edge of wearing out its welcome. If history is any guide, you’d expect a wider-scale correction in the next year or two.
If so, the exciting names are probably the most vulnerable to steep losses. That doesn’t fit Cisco stock at all. Here, you have an investment supported by a stable balance sheet, strongly positive cash flow and a dividend. While these attributes won’t prevent spilling red ink, any volatility will at least be mitigated.
Therefore, from both a strategic and tactical perspective, Cisco stock just makes sense.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.