Is Cisco Systems a Risky Investment?

With shares of Cisco Systems (NASDAQ:CSCO) trading around $21, is CSCO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Cisco Systems designs, manufactures, and sells Internet protocol-based networking and other products related to communications, and provides services associated with these products and their use to information technology industries worldwide. The company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. Cisco operates in five segments: United States and Canada, European markets, emerging markets, Asia Pacific, and Japan.

Cisco Systems is following in rival International Business Machines’ (NYSE:IBM) footsteps and investing more than $1 billion in its cloud computing offerings over the course of the next two years. IBM announced that it would make a similarly large investment in the technology earlier this year and purchased cloud computing company Cloudant Inc. last month. Both companies still lag behind industry pioneer Amazon.com Inc.’s (NASDAQ:AMZN) Amazon Web Services. Like IBM, Cisco is turning to the technology as hardware sales have plummeted and companies increasingly prefer to invest in cloud-based servers rather than maintaining their own hardware. Cisco’s past few quarterly results have shown the drag this shift has had on a company that is primarily known for its hardware. Cisco says the $1 billion investment will go toward building more data centers that companies can access to do tasks like store information or allow employees to access their work computers from home.

T = Technicals on the Stock Chart Are Weak

Cisco Systems stock has been trading sideways over the past couple of months. The stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Cisco Systems is trading below its rising key averages which signal neutral to bearish price action in the near-term.

CSCO

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Cisco Systems options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Cisco Systems options

21.21%

80%

78%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Steep

Average

May Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Cisco Systems’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Cisco Systems look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-54.24%

-5.13%

17.48%

15%

Revenue Growth (Y-O-Y)

-7.77%

1.76%

6.22%

5.42%

Earnings Reaction

-2.53%

-10.95%

-7.17%

12.63%

Cisco Systems has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Cisco Systems’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Cisco Systems stock done relative to its peers, HP (NYSE:HPQ), Alcatel-Lucent (NYSE:ALU), Juniper Networks (NYSE:JNPR), and sector?

Cisco Systems

HP

Alcatel-Lucent

Juniper Networks

Sector

Year-to-Date Return

-4.06%

13.58%

-15.70%

13.96%

2.94%

Cisco Systems has been an average performer, year-to-date.

Conclusion

Cisco is a provider of  networking solutions to companies and consumers worldwide. The company is investing more than $1 billion in its cloud computing offerings over the course of the next two years. The stock has been trading sideways over the past couple of months and is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has produced mixed feelings among investors. Relative to its peers and sector, Cisco has been an average year-to-date performer. WAIT AND SEE what Cisco does in coming quarters.

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