Oracle Corporation (ORCL), International Business Machines Corp. (IBM): What Cisco Systems, Inc. (CSCO)’s Results Mean to the Tech Market

What to do with the big three?
Frankly, if you are thinking about investing in any of these three companies, then you need to forget about expecting too much help from the macro-environment. International Business Machines Corp. (NYSE:IBM)’s prospects are about its internal restructuring in order to focus on higher margin sales rather than pure revenue generation. Oracle Corporation (NASDAQ:ORCL) is managing a shift in its revenue to cloud-based software, while also undergoing a transition to new hardware product systems.

One thing that all three have in common is prodigious cash generation, and they currently trade on historically attractive free cash flow yields.

IBM Free Cash Flow Yield data by YCharts

In Cisco’s case, you are looking at business that just generated around $11.7 billion in free cash flow, and has over $33 billion in net cash and investments. These figures represent significant percentages of Cisco’s current market cap of $129 billion.

Ultimately, the case for buying Cisco Systems, Inc. (NASDAQ:CSCO) remains the same as before these results. Top-line growth will be hard to generate organically (particularly from its switching and routing sales) but its cash generation and assets mean that it can make acquisitions in its non-core segments.

What Cisco needs to do
Here is a breakout of its core and non-core (collaboration, service provider video, wireless, security and data center) revenue growth.

Source: Company accounts

Cisco’s challenge is to carry on making acquisitions in order to generate growth in a slow economic environment.  In this way it can also help generate growth in its service sales. As a long-term investment proposition, the stock remains compelling, but just be prepared for some short-term disappointments along the way. Global economic growth remains slow and patchy.

The article What Cisco’s Results Mean to the Tech Market originally appeared on Fool.com and is written by Lee Samaha.

Lee Samaha has a position in Oracle. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines and Oracle.

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