Better Buy: Cisco Systems, Inc. Vs. Oracle Corporation
By Leo Sun | July 19, 2018 |

Cisco (NASDAQ:CSCO) and Oracle (NYSE:ORCL) are often considered "mature" tech stocks that generate stable but unremarkable returns. Yet Cisco outperformed the S&P 500's 5% gain with a 12% rally this year; Oracle's stock stayed nearly flat.

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In a comparison of these two stocks back in March, I concluded that Cisco's higher dividend and cash repatriation plans made it a better buy. But it's time examine some recent developments to see if Cisco still comes out ahead.

A Closer Look At Cisco
Cisco is the world's largest manufacturer of network routers and ethernet switches. Those businesses are included in its "infrastructure platforms" business, which generated nearly 60% of its sales last quarter. Cisco has been losing share in both of those markets to challengers like Huawei, Hewlett-Packard Enterprise, Juniper Networks, and Arista Networks.

Huawei and Arista are particularly dangerous rivals. Huawei is disrupting Cisco's market in China, and disputes over national security and tariffs could exacerbate that pain. Arista specializes in switches and open source software for cheaper generic "white boxes." Carriers that use white boxes can break free of the hardware and software bundles that Cisco uses to lock in customers.

To reduce its dependence on its routers and switches, Cisco is expanding its portfolio of cybersecurity products, collaboration software, and wireless services. These higher-growth businesses accounted for 15% of its top line last quarter. Cisco's services revenue, which comes from its services for hardware and software products, accounted for the remaining 25% of its total sales.

A Closer Look At Oracle
Oracle's core business sells database hardware and software to enterprise customers. That's a slow-growth business, because many large companies already use big database management solutions. To offset that slowdown, Oracle introduced new cloud services, which can generate stable subscription revenues and allow it to cross-sell new features.

Oracle's core software as a service (SaaS) product is the Fusion Cloud, which provides cloud-based human capital management, customer relationship management, and enterprise management tools for large companies. Its IaaS/PaaS (infrastructure/platform as a service) platforms provide remote computing power to companies that don't want to rely on on-premise servers.

In the past, Oracle reported its SaaS/IaaS/PaaS revenues separately. Oracle stopped disclosing those revenues separately last quarter, however, and opted to break its business into four units: Cloud Services and License Support (60% of its revenues), Cloud License and On-Premise License (22%), Hardware (10%), and Services (8%). Analysts accused Oracle of changing its reporting segments to obfuscate the weakness of its cloud business, but co-CEO Mark Hurd flippantly dismissed the notion as a "nothing burger" during the conference call.

Comparing Growth Rates And Valuations
Cisco's growth pattern is predictable -- it usually generates low single-digit sales growth from its infrastructure platforms and services, and low double-digit sales growth from its application and security businesses. Cisco's earnings are also being buoyed by lower tax rates, and its recent repatriation of $67 billion in overseas cash will further bolster its earnings with big buybacks.

Wall Street expects Cisco's sales and earnings to grow 3% and 8%, respectively, this fiscal year (which ends on Jul. 29). Next year, its sales are expected to rise another 3% as its earnings, buoyed by buybacks, climb 12%. Those are decent growth rates for a stock that trades at just 15 times forward earnings.

It was once easy to track Oracle's growth, which generally included high double-digit growth in cloud revenues and low single-digit growth in everything else. However, Oracle's latest change complicates things, because it scatters its cloud-services growth across the two new cloud segments -- one of which generates single-digit growth, and another which posts single-digit declines.

Most of Oracle's $67 billion in cash and equivalents still remains overseas. But unlike Cisco, Oracle hasn't revealed any concrete plans for repatriating that cash. Wall Street expects Oracle's revenue and earnings to rise 2% and 8%, respectively, this fiscal year (which ends next May). That's a decent growth rate for a stock that trades at 13 times forward earnings.

But when it comes to dividends, Cisco's 3.1% forward yield easily beats Oracle's 1.7% yield. Cisco has already earmarked a large portion of its repatriated cash for dividends, so investors should expect significant dividend hikes in the near future.

The Winner: Cisco
Cisco faces challenges, but it will probably keep generating slow-but-steady growth in an increasingly connected world. The repatriation of its cash will also tighten up its valuations with buybacks, attract more income investors with higher dividends, and help widen its moat with domestic acquisitions.

Oracle's lack of clarity regarding its cloud business and overseas cash is bothersome, and the company seems to be treading water instead of swimming forward. Therefore, I'd still stick with Cisco instead of Oracle.

This article originally appeared on The Motley Fool.