Source: PaxForex Premium Analytics Portal, Fundamental Insight

Cisco Systems is often considered a mature technology stock, and many of its shareholders are looking for stability and earnings rather than growth. In contrast to that trend, the network technology leader's stock price has risen more than 40 percent in the past 12 months and has exceeded both the S&P 500 and the Nasdaq Composite.

The stocks of Cisco also remained flat after the company unveiled new purposes for the next four years at Investor Day last Wednesday. Let's take a look at why these plans could cause even more bullish excitement around Cisco.

Cisco held its previous Investor Day four years ago. Back then, the company said it would produce more income from software, subscriptions, and services between fiscal years 2017 and 2021 (which ended this July) to decrease its total reliance on the networking hardware market.

The company made 30% of its total software revenue in fiscal 2021, higher from 20% in fiscal 2017 and in line with its own forecasts. Subscriptions valued for 79% of total software revenue in fiscal 2021, up from 52% in 2017 and above its target of 66%.

Cisco will generate 53% of its total software and services revenue in fiscal 2021, up from 42% in fiscal 2017 and exceeding its target of 50%.

From fiscal 2015 to 2021, Cisco's software revenue grew at a compound annual growth rate (CAGR) of 10%, and its subscription software revenue grew 23%. The company supported this growth through acquisitions in the faster-growing cloud, security, and Internet of Things markets.

Cisco anticipates its total revenue to rise at an annualized rate of 5-7% from fiscal 2021 to 2025. That would be a meaningful expedition from fiscal 2017-2021 when revenue growth was 1.5% per year. The company also expects adjusted EPS to increase at an annualized rate of 5-7% through 2025.

Cisco expects product subscription revenue to grow 15-17% year over year through 2025. The company also expects subscriptions to generate half of its revenue in fiscal 2025, up from 44% in 2021.

Enlargement of the entire addressable market, beyond routers and switches, has all the chances to push that acceleration. Cisco expects the TAM of its current business to grow 5% year over year to $260 billion from 2021 to 2025, while new "expansion markets" (including end-to-end security, agile networks, hybrid operations, optimized applications, optical modernization, and IoT) will grow 18% year over year to reach a $140 billion market.

Moreover, CSCO awaits the worldwide "future of work and automation" market, which will involve new types of remote working, automation, and cloud technologies, to be worth up to $500 billion. 

Basically, Cisco is sure that the world will become even more connected in the next few years and plans to use its leadership position in the networking hardware and software market to cross-sell even more services. That will attract more customers to subscriptions, which will provide higher profit margins and expand the competitive moat against smaller competitors such as Juniper.

Beginning in fiscal 2022, Cisco will replace its three main product categories -- infrastructure platforms, applications, and security -- with five new ones: secure, agile networks, hybrid operations, end-to-end security, Internet of the Future, and optimized application experiences.

Critics are likely to claim that this change hides the slowing growth of Cisco's router and switch business, and seems aimed at creating media hype with more sounding names.
But Cisco's new reporting units will also make it easier for investors to identify the strengths and weaknesses of the business, which were previously lumped into three opaque divisions. Thus, this change should benefit investors as Cisco moves beyond its core networking hardware and software business.

Over the past decade, Cisco has reduced its outstanding shares by 21%. In addition, the company has raised its dividend every year since the first payout in 2011. That trend should continue over the next four years. Cisco plans to return at least 50% of its free cash flow to shareholders through share buybacks and dividends, even as it expands its new business through new investments and acquisitions.

Cisco has been a modest investment for years, but its growth is accelerating as it develops and expands. Its stock trades at 16 times projected earnings and yields a dividend of 2.6 percent, and this low valuation and solid yield should limit the stock's downside potential at the start of a new growth cycle.

As long as the price is below 58.60, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 56.50
• Take Profit 1: 54.80
• Take Profit 2: 53.90

Alternative scenario:

If the level of 58.60 is broken-out, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 58.60
• Take profit 1: 60.10
• Take Profit 2: 61.00