Looking at earnings is a crucial part of investing. Earnings provide investors with the hard numbers to estimate the value of a stock or company. A company generating growing profits with a low PE is likely a strong buy. However, looking at earnings alone is not enough. Investors have to investigate if the earnings are sustainable, and the only way to really do that is to look at the underlying story.
Along came Cisco Systems, Inc. (NASDAQ:CSCO)
Cisco is a very strong company. The company’s EPS increased to $0.99 in the first six months of fiscal year 2013 from $0.73 in the previous year. In addition, the company recently started paying a dividend. While those are good reasons to invest, the best reason to invest in Cisco is its story.
The beauty of Cisco’s business is that it revolves around the Internet. Specifically, Cisco’s business revolves around networks, but the Internet is really just one massive network. Anyway, many investors today experienced the rise of computers and the Internet. Now, the world is in the midst of the mobile device revolution. This ongoing revolution is being spearheaded by the iPhone and iPad from Apple (NASDAQ:AAPL) and devices running Google Inc (NASDAQ:GOOG) Android, such as the Samsung Electronics Co., Ltd. (KRX:005935) Galaxy line.
Currently, mobile device shipments are exploding. Just looking at smartphones, in Q4 smartphone shipments climbed 41.7% year over year (IDC). The shipments climbed from 161 million in the previous year to 228 million smartphones in the recent quarter. To put this growth into perspective, the 228 million smartphones more than doubled the 90 million PCs that shipped worldwide. According to Cisco Systems, Inc. (NASDAQ:CSCO), mobile devices will outnumber the world’s population by the end of year 2013.
It’s all about the Internet
The point is that all these devices, from traditional computers to tablets to smartphones, revolve around the Internet. People buy smartphones to stay connected to the Internet. According to Cisco, by the end of year 2012, the average Android data use surpassed the average iPhone data use for the US and Western Europe. Since Android is the main OS shipping in smartphones, the rise in its data use shows that people are not just buying smartphones because of the rising availability, but because people want to stay connected. In Q4, Android’s and iOS’ market shares of smartphones were 70% and 21%, respectively.
This puts Cisco in a great position to generate strong profits for many years to come. The increasing Internet usage requires more bandwidth, which requires more networking equipment. Furthermore, the main devices that access the Internet could expand beyond traditional computers, smartphones, and tablets. Wearable smart devices might be the next big market. Samsung has already confirmed that the company is working on a smart watch, and there are rumors going around that Apple is working on the iWatch. Samsung executive Young Hee Lee stated, “We are preparing products for the future, and the watch is definitely one of them” (Bloomberg).
Furthermore, whether this market is a huge hit or not is actually not that important. Its success would just be a bonus for Cisco Systems, Inc. (NASDAQ:CSCO). According to Internet World Stats, only 34% of the entire world population were users of the Internet in June 2012. That equates to huge growth potential.
The bottom line
Looking at earnings is important. However, looking at earnings alone is not enough. Investors need to find the unfolding story that makes earnings sustainable. In the case of Cisco, it is the Internet. The Internet is at the center of technology revolutions happening today. Since Cisco dominates the networking industry and enterprise customers are loyal customers, this presents a very compelling story for why Cisco Systems, Inc. (NASDAQ:CSCO) is one of the best investments in the tech sector.
The article Going Beyond Earnings in Tech originally appeared on Fool.com and is written by Alvin Gonzales.
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