It's Time to Buy the "New" Cisco

If you're a tech investor and you're not in a state of perpetual worry, then you're probably not paying enough attention. From VMware, to F5 Networks, and Riverbed -- one right after the other -- punished for either subpar results, poor guidance or both. Although there were plenty of reasons to be bullish on Cisco's Q2 report, there was also doubt that it could avoid the Street's wrath. And despite soft enterprise IT spending and prolonged weakness from Europe, Cisco did well enough.

Revenue was light, but consistent with sector
Year-over-year revenue growth arrived at 5% while advancing 2% sequentially. Not exactly outstanding numbers. But these days, they don't need to be (and the Street wasn't expecting a blowout quarter). They just need to be solid, and in that regard, Cisco delivered. However, there was odd behavior in the company's top two businesses, routing and switching.

Both have suffered weaknesses of late, including in Q1 as both dropped 2% sequentially and 3% year over year. However, in this quarter, both hardware units went in opposite directions. Switch revenue grew 3% year over year, while routing revenue shed more than 5%. But management didn't sound all that concerned, nor were there any reasons to be. It's been clear from Cisco's recent acquisitions that the company is phasing out its focus on hardware. And it's working.

For that matter, the routing business, which now comprises of 16.1% of Cisco's total revenue, shed more than 1% sequentially. It's heading into the single digits, which would not be such a bad thing considering hardware margins aren't that impressive, not when compared to the company's stronger growth businesses such as data center, which grew 65%. Likewise, wireless services arrived solid, growing 20% year over year.

On the hand, the 1% growth in security services was disappointing. But it shouldn't have been a surprise considering that F5 only posted 1% sequential growth and Check Point didn't fare any better. This means that contrary to popular belief, Cisco is not gaining share against the likes of Palo Alto Networks , which just posted 50% revenue growth .

I have said this on more than one occasion and it's worth repeating here: Cisco can't afford to let Palo Alto get into the wrong hands. Both Check Point and F5 are in desperate need of Palo Alto's growth and margins. In that regard, Cisco's gross margin could have used a little help this quarter -- arriving lower sequentially and year-over-year on a non-GAAP basis. Disappointing router sales didn't help.

However, the company's product mix and adjustments were largely responsible. Again, there's no cause for concern there, especially since operating income advanced 4%. That said, it will be very encouraging if Cisco can reverse this trend in the Q3, while also strengthening operating margin. Although it arrived better than expected, it didn't signify the sort of leverage investors have come to expect or hope.

Third-quarter outlook was not great, but in-line
Cisco's Q2 numbers didn't reflect any sort of strength within the tech sector as a whole. Clearly, although the company is doing well managing its business, times are still tough. So it didn't come as a surprise that the company went the conservative route with Q3 guidance and projected 4% to 6% revenue growth. It wasn't the level of doom presumed by VMware, but Cisco's management didn't offer a rosier picture, either.

The issue is still with poor IT spending. And that seems to be the prominent theme regardless of where you look. But waiting on spending to rebound is easier when a company has a plan, which Cisco clearly does. Cisco's been using this macro headwind to its advantage. As rivals like Juniper are looking for ways to cut costs, Cisco's rash of acquisitions, including Intucell and Broadhop, positions Cisco with new addressable markets like software defined networking, or SDN.

Essentially, Cisco is saying it no longer cares to be just a hardware shop, which is why declining router revenue was not that alarming. The company's been making no investments in that area. What's more, Cisco recently unveiled its virtual cloud-routing and WAN optimization platform, aimed at taking a bite of out Riverbed's 52% WAN market share. Plus, given that Cisco still has $45 billion in cash, there's a good chance that this level of assault has only just begun.

Tremendous buy at this level
All of this makes Cisco one of the best and safest stocks to own. Besides, there's no way Cisco will accept just the 4% growth that it's calling for on the low end of its guidance -- not with its cash hoard sitting idle. And based on cash flow projections and sales trends, which includes 22% aggregate growth in services, this stock is worth (at least) $30 per share.

Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the low down on the routing juggernaut in The Motley Fool's premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as its story changes, so click here now to read more.

The article It's Time to Buy the "New" Cisco originally appeared on Fool.com.

Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies, Cisco Systems, F5 Networks, Riverbed Technology, and VMware. The Motley Fool owns shares of Check Point Software Technologies, F5 Networks, Riverbed Technology, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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