Source: PaxForex Premium Analytics Portal, Fundamental Insight

For the 4th quarter in a row, Cisco's revenue decreased as compared to the previous year. And in the middle of the management's revenue guidance range for the next quarter, there was again a decrease in the top line.

Nevertheless, Cisco's share price satisfies modest anticipations, and the technology giant is trying to stabilize its business as it shifts to subscription and software portfolio on the principle of "software as a service" (SaaS). So is it worth buying Cisco shares now?

During the first fiscal quarter ended October 31, Cisco's revenue fell 9% year on year to $11.9 billion, well in line with management's forecast of a 9% to 11% decline. But this still remains a significant decline.

Cisco faced problems in the corporate and commercial markets, partly due to the uncertain economic situation caused by the coronavirus pandemic. Besides, it still faces a secular decline in its outdated equipment portfolio.

In particular, the company's infrastructure platform, which encloses network and server devices, dropped 16% year on year to $6.3 billion.

Software and cloud solutions, on the other hand, partially offset this negative trend. Cisco does not report on the individual performance of its applications, but Chuck Robbins, the CEO, found some encouraging results in the earnings report. The number of participants in the WebEx communications platform almost doubled, reaching 600 million in October compared to March. And the company's security segment increased 6 percent year on year to $861 million due to high-performance cloud solutions such as Umbrella (software that offers remote workers secure access to cloud applications).

Yet, Cisco should continue to profit from growth opportunities in its core markets. Companies must invest over the next many years to take advantage of the increased network performance provided by the latest technologies such as 400G, 5G, and WiFi 6.

But above this growth, Cisco is trying to differentiate its portfolio by employing a broad scope of technologies in simplified subscription and SaaS solutions. As an example, the business revealed in October a new partnership with streaming video software specialist Qwilt to complete a streaming video platform for telecom service providers. And Chuck Robbins announced that the company would open similar offers in the next 12 months. 

The triumph of this modification stays to be seen, but the first signs of success have been noticed. For instance, the simplified security solution SecureX, released in June, has already been deployed in more than 4000 organizations. 

Also, on December 18, Autodesk CFO Scott Herren will take over as CFO of Cisco. His experience in transforming a software company into a SaaS business and customer service will help Cisco achieve similar goals over the past few years. 

Given Cisco's forecast of stabilizing the upper line in the second fiscal quarter (a 1% decline in revenue in the middle of the range of revenue forecasts), the stock jumped by almost 10% during off-hours.

But with a market limit of 3.7 times the 12-month revenue, the Cisco price does not look cheap due to lack of growth.

Nevertheless, one should also consider the high profitability of Cisco due to its huge scale. In the last quarter, the company's non-GAAP (adjusted) operating margin reached 32.7%, down from 33.6% in the previous quarter. And management expects the operating margin to remain in the range of 32% to 33% for the second fiscal quarter.

With such high margins, Cisco shares are traded with only 13-fold forward income, which is in line with modest expectations. And with cash, cash equivalents, and investments exceeding total debt at the end of the last quarter, the company could face a potentially prolonged recession. It could also embark on acquisitions to accelerate its transformation and spur its growth.

Of course, given the scale and legacy of Cisco, investors should not expect to see impressive revenue growth anytime soon. But with the low value of Cisco shares, it would be logical to consider them as a buy, as the technology giant is making a solid profit in upgrading its portfolio.

While the price is above 39.00, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 41.40
• Take Profit 1: 44.00
• Take Profit 2: 45.20

Alternative scenario:

If the level 39.00 is broken-down, follow the recommendations below.

• Time frame: D1
• Recommendation: short position
• Entry point: 39.00
• Take Profit 1: 37.00
• Take Profit 2: 35.80