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Why I’m Bullish on Cisco, Oracle and Enterprise Tech

Oracle (ORCL) earnings this week disappointed Wall Street and resulted in a mild selloff for shares, despite details that showed higher revenue and profit. Same for Cisco (CSCO), the enterprise technology giant that beat expectations in February and raised its dividend, but is down about 4% year-to-date despite this.

What gives? Why is Wall Street so bearish on enterprise tech lately?

Simply put, it seems to be a struggle between the old and the new. Companies like Cisco and Oracle represent the old guard of business technology, with their dominant server and software businesses. However, ORCL and CSCO stock holders care little for the past and are focused on a future where ambitious upstarts and cloud-computing growth are threatening to leave the old leaders in the dust.

Personally, I think the negativity is overblown. I think enterprise tech, broadly, has room to run and I think that old tech leaders like Cisco, IBM and Oracle still have a lot to offer.

Rise of  Cloud Computing

csco stock enterprise techIt’s undeniable that companies including Workday (WDAY) and NetSuite (N) have seen great growth in the last few years thanks to their cloud computing might. Both stocks have outperformed the S&P 500 nicely in both the short term and the medium term, while CSCO and ORCL stock remain weak.

That’s because sentiment has dramatically favored these new cloud computing names, but also because the fundamentals have favored them, too.

Consider that Workday has seen revenue explode since it has gone public. In FY2012, the company recorded $134 million in revenue. That’s about what it records in one quarter now!

It’s easy to fall in love with growth like this.

However, keep in mind that Cisco and Oracle haven’t been sitting out the cloud computing revolution. Oracle continues to see growth in cloud revenue — which, by the way, just hit $2.4 billion last quarter. While companies like Workday are seeing brisk growth, it’s undeniable that big guys like Oracle remain major players here.

A Hard Transition

Of course, the problem is that these new companies don’t have to pivot away from an old model. The reason CSCO stock has been under pressure isn’t necessarily because it’s not saying and doing the right things regarding the cloud, but because hardware spending is hard to come by and that continues to create a drag for both revenue and profits. Sales related to the cloud computing revolution may be growing at Cisco, but they aren’t growing fast enough. As a result, headline revenue and profit are expected to roll back this year.

This kind of difficult transition is not uncommon to enterprise tech companies. Take Microsoft (MSFT), which has struggled mightily in the last several years to adapt to the mobile age where PC-based Windows and Office just aren’t as in demand. Same for Intel (INTC), which is facing pressure to evolve its chips for mobile devices.

Cloud computing is another such disruptive challenge for “old tech” stocks. However, I remain convinced that the big guys are up to the task and are getting unfairly punished. Here’s why:

Slower Growth, But Still Stability: Remember, the $2.4 billion ORCL stock holder can claim as cloud computing revenue last quarter is roughly four times the sales of WDAY. Workday will have to continue its breakneck growth for a long time and Oracle will have to keep stumbling mightily to lose its grip. And with $37 billion in the bank, I think Oracle has plenty of ammunition to join the fight for cloud computing sales in earnest. Meanwhile, Workday and Netsuite aren’t even profitable yet.

Valuation: While there’s a lot of fuss about how much longer this red-hot market can run, enterprise tech giants like CSCO and Oracle may be the safest place to look for fairly valued equities right now. Cisco has a forward price-to-earnings ratio of about 10.3, compared with an average forward PE of about 15.3 for the average technology stock according to financial data site Finviz, and valuations much higher for high-growth tech stocks. And of course, cloud computing stocks like WDAY and NetSuite don’t even have forward price-to-earnings ratio because there aren’t any earnings to speak of.

Dividends: If I like any enterprise tech stock most, it’s Cisco — and it’s because of the CSCO dividend. With a 3.5% yield and a payout ratio that is only about one-third of earnings, it’s hard to argue against the long-term income potential of this stock, even if its share appreciation may not burn down the house. While ORCL stock pays a rather weak 1.3% dividend, there’s nothing precluding it from big increases in the near future with its cash hoard and its measly 13% dividend payout ratio.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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