Since the onset of the COVID-19 pandemic, communication equipment has been in high demand as the need for advanced connected technologies has increased, with people spending most of their time indoors. While the semiconductor chip shortage and supply chain crisis remain concerns, communication equipment is expected to keep witnessing increasing demand in the current 5G and internet of things (IoT) era as hybrid working is expected to continue. According to a Market Research Future report, the global telecom equipment market is expected to grow at a CAGR of 11.23% by 2025. As a result, both Cisco Systems (CSCO) and Ubiquiti Inc. (UI) should benefit. 

CSCO designs, manufactures, and sells Internet Protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products. UI develops networking technology solutions for high-capacity distributed Internet access, unified information technology, and consumer electronics.

CSCO has gained 15.6% over the past month, while UI has returned 2.5%. Also, CSCO’s 41.6% gains over the past year are higher than UI’s 10.1% returns. Moreover, CSCO is the clear winner with 19.6% gains versus UI’s negative returns in terms of the past six months’ performance.  But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On November 17, 2021, Chuck Robbins, Chair and CEO of CSCO, said, "Cisco's technology sits at the heart of the accelerated digital transformation happening today. Our breakthrough innovation, strong demand, and the success of our business transformation position us well for another year of growth in fiscal 2022."

UI's operations were hampered amid the COVID-19 pandemic for the three months ended September 30, 2021, as the current environment led to its inability to fulfill customer orders and increased its cost base. Also, its results are expected to be negatively impacted until the ongoing supply chain, and logistics issues caused by the global component supply shortage and the COVID-19 pandemic are resolved.

Recent Financial Results

CSCO’s net revenue increased 8% year-over-year to $12.90 billion for the fiscal first quarter ended October 30, 2021. The company’s non-GAAP operating income grew 10% year-over-year to $4.30 billion, while its non-GAAP net income came in at $3.50 billion, representing an 8% year-over-year increase. Also, its non-GAAP EPS came in at $0.82, up 5% year-over-year.

UI’s revenue decreased 3.1% year-over-year to $458.90 million for the fiscal first quarter ended September 30, 2021. The company’s income from operations declined 14.8% year-over-year to $161.70 million, while its non-GAAP net income came in at $132.80 million, representing a 15.5% year-over-year decrease. Also, its non-GAAP EPS came in at $2.12, down 14.2% year-over-year.

Past and Expected Financial Performance

CSCO’s net income and EPS grew at CAGRs of 108.1% and 117.4%, respectively, over the past three years. Analysts expect CSCO’s revenue to increase 5.9% in fiscal 2022 and 5% in fiscal 2023. The company’s EPS is expected to grow 6.2% in fiscal 2022 and 7.6% in fiscal 2023. Moreover, its EPS is expected to grow at a rate of 6.6% per annum over the next five years.

On the other hand, UI’s net income and EPS grew at CAGRs of 42% and 51.4%, respectively, over the past three years. The company’s revenue is expected to increase 2.8% in fiscal 2022 and 5.2% in fiscal 2023. Its EPS is expected to decline 5.9% in fiscal 2022 but grow 13.1% in fiscal 2023. Also, UI’s EPS is expected to grow at a rate of 23.9% per annum over the next five years.

Profitability

CSCO’s trailing-12-month revenue of $50.79 billion is significantly higher than UI’s $1.88 billion. Moreover, CSCO is more profitable with a gross profit margin of 63.73% compared to UI’s 47.45%.

Valuation

In terms of forward non-GAAP P/E, UI is currently trading at 33.37x, 80.2% higher than CSCO’s 18.51x. Moreover, UI’s forward EV/S ratio of 9.84x is 102.9% higher than CSCO’s 4.85x.

So, CSCO is relatively more affordable here.

POWR Ratings

CSCO has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, UI has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

CSCO has a grade of A for Quality. This is justified given CSCO's 28.19% trailing-12-month ROCE, 240.2% higher than the industry average of 8.29%. On the other hand, UI has a Quality grade of B.

Also, CSCO has a C grade for Value, consistent with its forward non-GAAP P/E of 18.51x, 26.6% lower than the industry average of 25.21x. However, UI has a D grade for Value, in sync with its forward non-GAAP P/E of 33.37x, 32.4% higher than the industry average of 25.21x.

Moreover, CSCO has a C grade for Growth, consistent with analysts’ expectations that its EPS will increase in the current year. On the other hand, UI has a D grade for Growth, in sync with analysts’ expectations that its EPS will decline in the current year.

Of the 55 stocks in the Technology - Communication/Networking industry, CSCO is ranked #7, while UI is ranked #22.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Momentum, and Value. Click here to view all the CSCO ratings. Also, get all the UI ratings here.

The Winner

The communication equipment market is expected to grow exponentially with increasing demand for advanced technologies. While both CSCO and UI are expected to benefit from the industry tailwinds, I believe CSCO is currently the better investment because of its robust financials, lower valuation, and higher profitability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology - Communication/Networking industry here.

CSCO shares were trading at $62.83 per share on Monday afternoon, down $0.54 (-0.85%). Year-to-date, CSCO has gained 44.52%, versus a 28.96% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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