Cisco Systems (CSCO) in San Jose, Calif., designs, manufactures and sells internet protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms that include networking technologies for switching, routing, wireless, and data center products. In comparison, Ubiquiti Inc. (UI) develops networking technology solutions for high-capacity distributed Internet access, unified information technology, and consumer electronics. UI is based in San Jose, Calif.

Amid the COVID-19 pandemic, networking solutions were in high demand as people spent most of their time indoors and relied on smart gadgets for their work. This trend is expected to continue in the near term due to the accelerated pace of digitization and increasing adoption of network-based technologies. According to a report by Markets and Markets, the global network-as-a-service (NaaS) market is expected to grow at a 29.4% CAGR from 2021 to 2026. Consequently, both CSCO and UI should benefit.

CSCO shares have gained 3.4% in price over the past three months, while UI has returned 1.1%. Also, CSCO’s 22.2% price gains over the past nine months are higher than UI’s 20% returns. Furthermore, CSCO is the clear winner with 23.1% gains versus UI’s 10.7% returns in terms of year-to-date performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

CSCO acquired Socio Labs, Inc. on July 8. Jeetu Patel, the company’s executive vice president and general manager, said, “The acquisition of Socio Labs is another example of how Cisco is rapidly addressing the evolving needs of our Webex customers and continuing to execute on our vision of providing the most seamless, inclusive, engaging and intelligent platform for meetings and events.”

Several law firms have filed a class-action lawsuit against UI, alleging that it failed to speak fully and truthfully in its statements concerning a data breach. As a result, UI’s positive statements about its business, operations, and prospects were materially misleading and/or lacked a reasonable basis, the suit alleges.

Recent Financial Results

CSCO’s net revenue increased 8% year-over-year to $13.10 billion for its fiscal fourth quarter, ended July 31, 2021. The company’s non-GAAP operating income grew 10% year-over-year to $4.4 billion, while its cash flow from operating activities increased 18% year-over-year to $4.50 billion. Also, its non-GAAP EPS came in at $0.84, up 5% year-over-year.

UI’s net revenue increased 51.5% year-over-year to $477.90 million for its fiscal fourth quarter, ended June 30, 2021. The company’s income from operations grew 54.8% year-over-year to $182.8 million, while its non-GAAP net income increased 66.2% year-over-year to $154.90 million. Also, its non-GAAP EPS was $2.47, up 69.2% year-over-year.

Past and Expected Financial Performance

CSCO’s net income and EPS have grown at CAGRs of 798% and 196.4%, respectively, over the past three years. Analysts expect CSCO’s revenue to increase 6.1% in its fiscal year 2022 and 4.2% in fiscal 2023. The company’s EPS is expected to grow 6.5% in fiscal 2022 and 7% in fiscal 2023. Also, its EPS is expected to grow at a 6.5% rate per annum over the next five years.

In contrast, UI’s net income and EPS have grown at CAGRs of 46.4% and 57.4%, respectively, over the past three years. The company’s revenue is expected to increase 12.1% in its fiscal year 2022 and 7.7% in fiscal 2023. Its EPS is expected to grow 12.6% in fiscal 2022 and 6.6% in fiscal 2023. Also, UI’s EPS is expected to grow at a 23.9% rate per annum over the next five years.

Profitability

CSCO’s $49.82 billion trailing-12-month revenue is significantly higher than UI’s $1.90 billion. Moreover, CSCO is more profitable, with a 64.02% gross profit margin compared to UI’s 48.06%.

Furthermore, CSCO’s  26.75%  ROE compares to UI’s negative returns.

Valuation

In terms of forward non-GAAP P/E, UI is currently trading at 28.04x, which is 74.8% higher than CSCO’s 16.04x. Moreover, UI’s 35.79x forward EV/EBITDA ratio is 223% higher than CSCO’s 11.08x.

So, CSCO is relatively more affordable here.

POWR Ratings

CSCO has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. In comparison, UI has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Both CSCO and UI have a B grade for Sentiment, in sync with favorable analyst sentiment.

In addition, CSCO has an A grade for Quality. This is justified given CSCO’s 64.02% trailing-12-month gross profit margin, which is 31.2% higher than the 48.78% industry average. In contrast, UI has a Quality grade of B.

Moreover, CSCO has a B grade for Stability, which is consistent with its 0.92 beta. However, UI has a C grade for Stability, consistent with its 1.38 beta.

Of the 55 stocks in the Technology – Communication/Networking industry, CSCO is ranked #3, while UI is ranked #29.

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 networking solutions market is expected to grow exponentially with increasing demand for advanced technologies. While both CSCO and UI are expected to gain in the long run, we think it is better to bet on CSCO now because of its 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.

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