Better Buy: Cisco Systems vs. Microsoft

Does quality or value guideline the day?

Billy Duberstein

Two of the best-known large-cap tech behemoths today are Microsoft and Cisco Systems Both offer a mix of software and hardware products, but Microsoft is actually, by and large, a software and services company, whereas Cisco is mainly a hardware business.

Software application is the far more desirable company, as each company’s recent results below will suggest. However, Cisco is also the far less expensive stock and sports a much higher dividend. Which business is the much better buy today?

A young male investor in glasses weighs a decision in front of  his laptop.

Microsoft vs. Cisco: The face-off. Image source: Getty Images.

Each business’s main products

Microsoft is mostly known for its Windows operating system however is actually relatively well-diversified today across operating systems, company software application (including its Workplace and Dynamics efficiency suites), and its high-growth Azure cloud-computing platform. It also owns LinkedIn, the leading business social network, which the company acquired in 2016, and Github, a platform that allows coders to team up together, which the business purchased in2018 Microsoft likewise has its own high-end line of tablets and laptop computers under its Surface area brand name, in addition to the Xbox gaming system, which is slated for a new console design later on this year.

By contrast, Cisco is generally understood for its networking products throughout switches, routers, and networking access points. Cisco is known as an acquisition device, concentrating on smaller “tuck-in” acquisitions across cybersecurity, application diagnostics, and video conferencing.

Current outcomes

When comparing each company’s recent outcomes, it’s truly no contest. Microsoft wins hands down.

Cisco has actually had a hard time just recently, as large business customers have been shy to invest heavily in new infrastructure under the cloud of the U.S.-China trade war. Though a “phase one” trade offer was accepted in December and signed in January, Cisco’s January-quarter numbers lagged well behind:

Company

Income growth (YOY)

Operating earnings growth (YOY)

EPS growth (YOY)

Microsoft( NASDAQ: MSFT)

137%

354%

398%

Cisco( NASDAQ: CSCO)

( 3.5%)

5.3%

7.9%

Data source: Company filings. Chart by author. YOY = year over year. EPS = earnings per share.

Microsoft has actually clearly taken advantage of the shift to cloud computing, with its Azure platform taking one of the most market share in the market over the past year. Not just has actually Azure been being available in strong, logging 63.9%growth last year, but Microsoft has likewise transitioned its primary Workplace and Characteristics software offerings into successful and modern software-as-a-service items delivered online.

On The Other Hand, Cisco should in theory benefit from the cloud transformation, as well, as cloud increases the requirement for more connectivity and changes inside data.

That cyclicality and competitors were behind Cisco’s below average outcomes last quarter.

Attempting to adapt, Cisco management recently revealed its own silicon elements that it would want to sell to clients for their own white-box solutions. It’s an exceptional relocation, for sure, however it’s also one that Cisco is constructing out of necessity, not since it really wants to offer private parts over its expensive incorporated systems.

Appraisals make the option more difficult

Financiers have actually been hip to the difference between these 2 innovation giants, appointing each a very different evaluation.

Business

P/E Ratio

Forward P/E Ratio

Dividend Yield

Microsoft( NASDAQ: MSFT)

294

270

1.2%

Cisco( NASDAQ: CSCO)

164

124

3.4%

Data source: Yahoo! financing. Chart by author. P/E = price to revenues ratio.

As you can see, Cisco truly outperforms Microsoft in regards to being the less expensive stock. Note that Cisco’s forward price-to-earnings ratio implies some healthy development as the company comes back from a cyclical swoon.

However, the COVID-19 coronavirus might put a crimp in Cisco’s outlook, as consumers are probably most likely to stay careful on purchases and investments. Microsoft’s software-heavy portfolio is likely less impacted by the virus downturn.

In unpredictable times, choose the better-performing business

Though the choice between Microsoft’s remarkable growth and Cisco’s worth may be challenging, in unsure times such as these, I would constantly aim to the higher-quality business with the larger moat, as long as it’s reasonably priced.

Hands down, that’s Microsoft today. It may seem a tad expensive to some, however in today’s low-interest rate world and considering the company’s ascension in the high-growth cloud-computing industry, it’s the clear pick for me. I do not think Microsoft is even quite as pricey as it looks at very first glance.


Billy Duberstein owns shares of Microsoft. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Arista Networks and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Teresa Kersten, a staff member of LinkedIn, a Microsoft subsidiary, belongs to The Motley Fool’s board of directors. Billy Duberstein owns shares of Microsoft. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and suggests Arista Networks and Microsoft and recommends the following alternatives: long January2021 $85 contacts Microsoft and brief January 2021 $ 115 contacts Microsoft. The Motley Fool has a disclosure policy

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