In this piece, I evaluated two tech stocks, Cisco Systems, Inc. (CSCO) and BlackBerry Limited (BB), to determine which has better return potential. Based on a fundamental comparison of these stocks, I find CSCO a better pick for reasons explained throughout this article.
Tech stocks have remained under pressure since last year due to the Fed’s aggressive interest rate hikes. The Fed funds rate is at a 16-year-high, and the recently released robust macroeconomic data has increased the odds of another rate hike this month. Despite the uncertainty looming over rate hikes, many tech stocks now look attractive for long-term investments, thanks to continued breakthroughs and digitization.
According to Gartner, worldwide IT spending in 2023 is forecasted to increase 5.5% year-over-year to $4.60 trillion. Spending on Communication Services is expected to increase 3.9% year-over-year to $1.48 trillion. Gartner’s VP Analyst John-David Lovelock said, “Macroeconomic headwinds are not slowing digital transformation.”
CSCO surpassed the consensus EPS and revenue estimates during the third quarter. Its EPS beat analyst estimates by 3.3%, while its revenue came in 1.5% above the consensus estimate. Similarly, BB’s revenue came marginally higher than the analyst estimates. However, the company reported a loss in the fourth quarter.
CSCO’s Chair and CEO Chuck Robbins said, “We once again delivered a strong quarter in a dynamic environment. In Q3, we delivered record revenue and double-digit growth in both software and subscription revenue. As key technologies like cloud, AI, and security continue to scale, Cisco’s long-established leadership in networking and the breadth of our portfolio position is well for the future.”
CSCO expects its revenue for the fourth quarter to grow between 14% and 16% year-over-year. Its non-GAAP EPS is expected to come between $1.05 and $1.07. For fiscal 2023, the company expects its revenue to grow between 10% and 10.5% year-over-year. Its non-GAAP EPS is expected to come between $3.80 and $3.82.
BB expects its revenue for fiscal 2024 to be between $665 million and $700 million. The company expects to improve non-GAAP loss per share and cash flow usage in fiscal 2024. It also expects to achieve non-GAAP profitability during the fourth quarter of fiscal 2024. BB expects to generate positive full-year non-GAAP EPS and cash flow beginning in 2025.
When it comes to price performance, CSCO is the clear winner. CSCO stock has delivered positive returns in all time frames. In addition, CSCO’s stock has gained 9.5% over the past nine months, compared to BB’s 10.4% decline.
However, here are the reasons I think CSCO could perform better in the near term:
Recent Financial Results
CSCO’s total revenue for the third quarter ended April 29, 2023, increased 13.5% year-over-year to $14.57 billion. Its non-GAAP net income increased 13.2% over the prior-year quarter to $4.11 billion. Its non-GAAP EPS came in at $1, representing an increase of 14.9% year-over-year. The company’s non-GAAP operating income rose 11% year-over-year to $4.94 billion.
For the fiscal fourth quarter ended February 28, 2023, BB’s revenue declined 18.4% year-over-year to $151 million. Its adjusted operating loss came in at $17 million, compared to an adjusted operating income of $8 million in the prior-year quarter. The company’s adjusted EBITDA loss came in at $12 million, compared to an adjusted EBITDA of $20 million in the year-ago period.
Additionally, its adjusted net loss came in at $13 million, compared to an adjusted net income of $6 million in the prior-year quarter. Also, its adjusted loss per share came in at $0.02, compared to an adjusted EPS of $0.01 in the year-ago quarter.
Expected Financial Performance
Analysts expect CSCO’s EPS for fiscal 2023 and 2024 to increase 13.3% and 6.5% year-over-year to $3.81 and $4.05. Its fiscal 2023 and 2024 revenue is expected to increase 10.1% and 2.9% year-over-year to $56.78 billion and $58.43 billion. Its EPS and revenue for the quarter ending July 31, 2023, are expected to increase 27.7% and 14.9% year-over-year to $1.06 and $15.05 billion, respectively.
For fiscal 2024, BB’s EPS is expected to remain negative. Its fiscal 2024 and 2025 revenue is expected to increase 6.4% and 14.6% year-over-year to $698.24 million and $799.95 million. BB’s EPS for the quarter ended May 31, 2023, is expected to remain negative. Its revenue for the same quarter is expected to decline 5.8% year-over-year to $158.18 million.
Profitability
CSCO’s trailing-12-month revenue is 83.7 times what BB generates. CSCO is more profitable, with an EBITDA margin and levered FCF margin of 29.52% and 27.29%, compared to BB’s negative 17.07% and 8.90%, respectively. Also, CSCO’s asset turnover of 0.58x compares to BB’s 0.31x.
Valuation
In terms of forward EV/Sales, CSCO is currently trading at 3.32x, 23.8% lower than BB’s 4.36x. CSCO’s trailing-12-month Price/Sales ratio of 3.72x is 18.8% lower than BB’s 4.58x.
Thus, CSCO is relatively more affordable.
POWR Ratings
CSCO has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, BB has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCO has an A grade for Quality, in sync with its high profitability. BB’s poor profitability justifies its D grade for Quality.
CSCO has a C grade for Value, consistent with its mixed valuation. On the other hand, BB has a D grade for Value, in sync with the company’s stretched valuation.
Of the 50 stocks in the Technology – Communication/Networking industry, CSCO is ranked #3, while BB is ranked #47 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view CSCO’s ratings. Get all the ratings of BB here.
The Winner
Since the pandemic, enterprises have been ramping up investments in digitizing their operations at a pace never seen before. Although investments in tech have slowed down due to the uncertain macroeconomic environment, the industry's long-term prospects look bright.
CSCO beat the consensus EPS and revenue estimate in the third quarter. It aims to continue its strong performance in the final quarter of fiscal 2023 and in fiscal 2024, with strong growth in its top line and earnings.
On the other hand, BB reported a drop in its revenue and a non-GAAP net loss during the fourth quarter. The company has forecasted solid growth in its fiscal 2024 IoT and cybersecurity revenue. However, profitability will continue to elude it over the next few quarters.
Considering these factors, CSCO could be a better choice than BB.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology – Communication/Networking industry here.
What To Do Next?
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CSCO shares fell $0.16 (-0.32%) in premarket trading Friday. Year-to-date, CSCO has gained 5.54%, versus a 12.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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