A few days ago, International Data Corporation (IDC), a research firm based in Massachusetts, published a new report about the Internet of Things (IoT), forecasting that this market will grow very rapidly in the next few years thanks to the increasing adoption of 5G technology.
For those who are not familiar with the concept, IoT refers to a variety of intercommunicating devices that form a communication network with both users and other IoT-connected devices. Examples of residential IoT applications include opening the front door via an app, adjusting the internal temperature of the home remotely, turning on lights and TV, controlling music playback in the stereo, etc. through a few simple commands activated remotely via a universal controller.
The IDC predicts that global spending on IoT will be almost $755 billion in 2021 and could reach as high as $1.2 trillion by 2025. Essentially, IoT spending around the world is predicted to expand at a compound annual growth rate of more than 11% between 2021 and 2025, according to IDC.
With a market that is projected to improve so much, remaining on the sidelines and passively witnessing the success of others seems like a missed opportunity, in my opinion. While many IoT-related investments will likely be high-risk, there are some safer options amid more seasoned technology companis that are making headway in the IoT market.
Cisco Systems Inc (CSCO, Financial) represents one such company. As an established tech giant with solid IoT offerings, it is a good candidate to profit from this trend. The California-based communication equipment company has a presence in the global market and holds a well-diversified portfolio of products.
In addition to IoT and other products for unified communications, Cisco provides infrastructure platforms and various products to secure networks and to protect against cyber threats. The company is serving businesses of any size as well as public entities and communication service providers in North America and overseas.
The business is yielding high margins, exceeding the majority of competitors. For example, Cisco's operating margin was 27.55% as of the first quarter of fiscal 2022, while the industry median stood at only 4.65%. The net margin was 22.44% versus the industry median of 3.7%, and the return on capital ratio was 623.84% versus the industry median of 13.01%.
The diluted earnings per share without non-recurring items came in at $0.70 in the first quarter of fiscal 2022 (up 37.3% year-over-year); the EPS without NRI has grown by 400% on average every year over the past three years.
During the first quarter of fiscal 2022, Cisco achieved strong results across regions and markets, plus good progress in customer retention rates. This indicates that despite the supply chain crunch and other economic uncertainties, Cisco proved to be quite resilient.
The company's top line also performed well. Increased sales across product categories drove Cisco's total revenues up to nearly $13 billion. The turnover jumped 9% on a year-over-year basis. The annualized recurring revenue increased 10% to $21.6 billion.
For full fiscal 2022, Cisco expects diluted EPS without NRI to be around $2.83 on total revenues of approximately $52.31 billion to $53.31 billion.
The current ratio is 1.62 and the interest coverage ratio is 34.04, indicating a fortress-like balance sheet that should be able to weather many difficulties. The company should easily be able to continue to pay the quarterly dividend of $0.37 per share and, with $24 billion in cash on hand, also fund the repurchase of its own stock. These could be two additional catalysts that could potentially lead to higher share prices. The forward dividend is $1.48, yielding 2.60% as of the writing of this article, while $7.7 billion has been allocated under the company's stock repurchase program.
The stock price was $57.02 per share at close on Wednesday for a market cap of $240.49 billion and a 52-week range of $43.35 to $60.27.
The share price is above the 50-day moving average value of $55.79 and the 200-day moving average value of $53.99. The price-earnings ratio is 21.2 versus the industry median of 21.78, so the stock doesn’t seem expensive, especially considering its growth potential.
Sell-side analysts on Wall Street give the stock an overweight recommendation rating with an average target price of $62.14 per share.
The 14-day relative strength index is 55, which suggests that shares are neither overbought nor oversold.
