Cisco Systems, Inc. (CSCO) and Ubiquiti Inc. (UI) are two prominent players in the networking industry. CSCO in San Jose, Calif., designs and manufactures Internet Protocol (IP) based networking products and services related to communications and information technology worldwide. It sells its products and services directly and through systems integrators, service providers, resellers, and distributors. In comparison, UI in San Jose, Calif., provides various networking products and solutions for service providers and enterprises worldwide. It offers radios, antennas, and management tools that have been designed to deliver carrier-class performance for wireless networking and other applications in the unlicensed radio frequency realm.
Most tech companies have lost significant value in recent selloffs triggered by the Federal Reserve’s hawkish stance on controlling multi-decade high inflation. While the tech-heavy Nasdaq Composite has recovered slightly on the low inflation forecast for May, lingering economic and geopolitical concerns will likely keep the index under pressure. However, surging demand for advanced and secure networking solutions and significant corporate and government funding to improve broadband infrastructure should help the industry rebound soon.
Investors’ interest in networking stocks is evidenced by the Invesco Dynamic Networking ETF’s (PXQ) 2.9% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 1.1% gains. The global telecom equipment market is expected to grow at a 9.2% CAGR to $474.06 billion by 2028. The global networking equipment market is expected to grow at a 4.6% CAGR to $141.39 billion by 2028. Therefore, both CSCO and UI should benefit. UI stock is a winner with 1.3% gains over the past week versus CSCO’s marginal loss. But which of these stocks is a better pick now? Read on, let’s find out.
Recent Financial Results
CSCO’s total revenue for its fiscal 2022 third quarter, ended April 30, 2022, increased marginally year-over-year to $12.84 billion. The company’s non-GAAP gross profit came in at $8.39 billion, indicating a marginal year-over-year decline. Its non-GAAP operating income was $4.45 billion for the quarter, representing a 3.6% rise from the year-ago period. While its non-GAAP net income increased 3.5% year-over-year to $3.63 billion, its non-GAAP EPS grew 4.8% to $0.87. As of April 30, 2022, the company had $6.95 billion in cash and equivalents.
For its fiscal year 2022 third quarter, ended March 31, 2022, UI’s revenues decreased 23.4% year-over-year to $358.07 million. The company’s gross profit came in at $116.02 million, representing a 47.9% decline from the prior-year period. Its income from operations was $62.61 million, down 65% from the year-ago period. UI’s non-GAAP net income was $51.02 million, indicating a 64.8% year-over-year decline. Its non-GAAP EPS decreased 63.9% year-over-year to $0.83. As of March 31, 2022, the company had $144.31 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, CSCO’s EBITDA and levered free cash flow have increased at CAGRs of 1.1% and 2%, respectively.
CSCO’s EPS is expected to increase 4% year-over-year in its fiscal year 2022, ending July 31, 2022, and 6% in fiscal 2023. Its revenue is expected to grow 2.7% in fiscal 2022 and 3.5% in fiscal 2023. Analysts expect the company’s EPS to rise at a 6.5% rate per annum over the next five years.
Over the past three years, UI’s EBITDA and levered free cash flow have grown at CAGRs of 10.3% and 52.2%, respectively.
Analysts expect UI’s EPS to decline 40.4% year-over-year in its fiscal 2022, ending June 30, 2022, and rise 34.9% in fiscal 2023. Its revenue is expected to decline 14.5% year-over-year in fiscal 2022 and rise 6.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 23.9% rate per annum over the next five years.
Valuation
In terms of non-GAAP P/E, UI is currently trading at 47.35x, which is 248.7% higher than CSCO’s 13.58x. And in terms of forward EV/Sales, CSCO’s 3.48x compares with UI’s 10.42x.
Profitability
CSCO’s trailing-12-month revenue is 29.8 times UI’s. However, UI is more profitable, with a 31.7% EBITDA margin versus CSCO’s 31.2%.
Furthermore, UI’s ROA and ROTC of 66.4% and 40.3%, respectively, compare with CSCO’s 9.5% and 17.1%, respectively.
POWR Ratings
While CSCO has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, UI has an overall C grade, which equates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both CSCO and UI have been graded an A for Quality, which is consistent with their higher-than-industry profitability ratios. CSCO’s 23.3% trailing-12-month net income margin is 318.6% higher than the 5.6% industry average. And UI’s 25.5% trailing-12-month net income margin is 358.9% lower than the 5.6% industry average.
CSCO has a C grade for Value, which is in sync with its slightly higher-than-industry valuation ratios. CSCO’s 3.48x forward EV/Sales is 19.4% higher than the 2.91x industry average. UI’s D grade for Value reflects its overvaluation. Its 10.42x forward EV/Sales is 257.5% higher than the 2.91x industry average.
Among the 54 stocks in the C-rated Technology - Communication/Networking industry, CSCO is ranked #10, while UI is ranked #25.
Beyond what we have stated above, our POWR Ratings system has graded CSCO and UI for Growth, Momentum, Stability, and Sentiment. Get all CSCO ratings here. Also, click here to see the additional POWR Ratings for UI.
The Winner
Increasing demand for advanced and efficient communication equipment and solutions and favorable policy support should benefit CSCO and UI. However, we think its relatively lower valuation makes CSCO a better buy here.
Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology - Communication/Networking industry.
CSCO shares were trading at $45.10 per share on Wednesday afternoon, down $0.47 (-1.03%). Year-to-date, CSCO has declined -27.92%, versus a -13.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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