Cisco (NASDAQ:CSCO) stock is having a strong day as earnings top estimates. Cisco is a powerhouse of a company, with a solid balance sheet and great fundamentals.
Established as a global pioneer in the domain of communications equipment, Cisco Systems designs and sells an extensive array of technology that powers the internet. According to the latest 10-K report, over 40% of Cisco’s total sales are generated outside the Americas. The primary revenue stream, contributing nearly three-fourths of the total, comes from product sales.
Despite full internet penetration in developed regions, around a third of the global population remains without internet access. This presents a substantial long-term growth opportunity for Cisco, and given its vast scale and exceptional execution, it’s well-positioned to capitalize on these positive secular shifts.
To sustain its competitive advantages and enhance efficiency, the company regularly reinvests a significant part of its sales into R&D. Over the past decade, Cisco has funneled more than $60 billion into R&D. The company skillfully balances investing in innovation while maintaining a shareholder-friendly capital allocation. Its share buybacks have been substantial, amounting to about $80 billion over the past decade. Moreover, the company boasts a stellar dividend history, with 11 consecutive years of dividend hikes.
Cisco is as blue chip as it gets and is relatively well valued. However, the current uncertain macroeconomic environment poses the most significant risk for a market leader like Cisco.
Cisco Faces Macro Uncertainty
While recession fears are easing, numerous red flags suggest that macro headwinds could persist for multiple quarters. Global central banks’ rates remain high, and many of the world’s leading economies continue to implement rate hikes. The Eurozone, a significant market for the company, fell into recession in early summer. The war in Ukraine seems far from concluding, adding substantial uncertainty regarding the pace of economic recovery in the Eurozone.
Moreover, the uncertainty regarding a credit crunch remains high. Moody’s surprised the market by downgrading the credit rating of several mid-size banks and added that many big names like U.S. Bancorp (NYSE:USB) and Bank of New York Mellon (NYSE:BK) are under review for potential downgrades. This suggests that credit conditions will likely continue to tighten, which is detrimental to business activity levels and spending.
While Cisco’s robust balance sheet can withstand such conditions, it might negatively impact the overall stock market, exerting pressure on CSCO stock.
The Bottom Line on CSCO Stock
Bottom line? I think CSCO stock is a compelling “hold” for investors seeking a low-risk investment opportunity with a decent dividend yield. The company’s remarkable profitability, which continues to expand despite the massive scale of the business, is impressive. The stock is fairly valued I’d argue, and the upside potential outweighs the potential risks very long term.
However, investors should remain mindful of the potential impact of a credit event on Cisco’s stock in the short term.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
