The adoption of a hybrid working culture, increased demand for cybersecurity, and the commercial availability of 5G technology are driving the networking industry’s growth. Thus, popular networking stocks Cisco (CSCO) and Arista (ANET) are poised to deliver significant returns in the coming months. But let’s find out which of these stocks is a better buy now.

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide. Its offerings include infrastructure platforms, applications, security and other products.

Arista Networks, Inc. develops, markets, and sells cloud networking solutions that use software innovations to address the needs of Internet companies, cloud service providers and data centers for enterprise support. It also provides post-contract customer support services.

Because most businesses were forced to operate remotely during the worst of the COVID-19 pandemic, their increased adoption of cloud-based business solutions has allowed networking companies to grow significantly since the onset of the pandemic.

The growth of networking companies is expected to continue because many businesses are adopting hybrid-working models permanently. Furthermore, the heightened demand for cybersecurity and the emergence of 5G have been driving networking companies to develop innovative, secure and efficient solutions. The global network security market is expected to grow at a 12% CAGR over the next eight years to reach $60.38 billion by 2028. Consequently, both CSCO and ANET could see increasing demand for their products and services.

While CSCO has retreated marginally over the past month, ANET has surged 2.8%. But, in terms of their past six months’ performance, CSCO is a clear winner with 27.5% gains versus ANET’s 18.6% returns. But, which of these stocks is a better pick now? 

Latest Movements

On May 14, CSCO announced its intention to acquire Kenna Security, Inc., a privately held cybersecurity company in California. With Kenna’s risk-based vulnerability management technology, CSCO will transform the way security and IT teams collaborate to reduce the attack surface and the time it takes to detect and respond to cyberattacks. Because  individuals and organizations are adopting hybrid working models, the company anticipates healthy  sales amid the increasing need for cybersecurity.

On May 5, CSCO’s Webex, a leading provider of cloud-based collaboration solutions, and Box, Inc. (BOX), a leading cloud content management platform, announced a new and deepened integration between the two technology platforms, which will enable users to access Webex as a Recommended App within Box. This should help businesses  work securely in the cloud, and CSCO  expects to expand its customer base with the facility in the coming months.

On May 18, ANET unveiled a series of updates to its 7130-series switches aimed at simplifying the management and deployment of ultra-low latency networks, such as  high-frequency trading. The company  introduced its Extensible Operating System (EOS) management platform, alongside a new extension called SwitchApp, that allows users to achieve ultra-low latency when using traditional network topologies.

ANET introduced network intelligent capabilities to its core CloudVision management platform on April 7, to help manage and automate workflows across Arista-based networks. Available beginning in the second quarter, ANET hopes to generate  high demand for the product.

Recent Financial Results

CSCO’s total revenue for its  fiscal year 2021 third quarter, ended May 1,  increased 6.8% year-over-year to $12.80 billion. Its non-GAAP gross profit was  $8.45 billion, up 5.7% from the prior-year period. Its non-GAAP income from operations is reported to be $4.30 billion for the quarter, which represents a 2.8% improvement  year-over-year. While its non-GAAP net income increased 4.2% year-over-year to $3.51 billion, its EPS increased 5.1% year-over-year to $0.83.

For its fiscal year 2021 first quarter, ended March 31, ANET’s total revenue is reported at $667.56 million, which represents a 27.6% rise year-over-year. The company’s non-GAAP gross profit increased 23.3% year-over-year to $423.14 million. However, ANET’s non-GAAP income from operations is reported to be $251.28 million, up 29.5% from the prior-year period. Its non-GAAP net income increased 23% year-over-year to $198.84 million. And its  non-GAAP EPS increased 23.8% year-over-year to $2.50.

Past and Expected Financial Performance

CSCO’s revenue declined marginally, and its EBITDA grew at a 1.8% CAGR over the past year. The company’s total assets have been negative over the past three years.

Analysts expect CSCO’s revenue to increase 7.3% year-over-year for the fiscal year 2021 fourth quarter (ending July 31, 2021), marginally in the current year, and 4.2% in  2022. Its EPS is expected to increase 18.2% year-over-year for the second quarter, 20.9% for the current year, and 11.3% in  2022. CSCO’s EPS is expected to grow at a 5.8% rate per annum over the next five years.

In comparison, ANET’s revenue and EBITDA grew at CAGRs of 11.4% and 12.7% respectively, over the past three years. The company’s total assets have increased at a 23.8% rate over the past three years.

Analysts expect ANET’s revenue to rise 27.3% in its fiscal year 2021 second quarter (ending June 30, 2021), 19.2% in the current year, and 11.9% in 2022. Also, its EPS is expected to increase 20.3% in the second quarter, 13.6% in the current year, and 11.9% next year. Furthermore, its EPS is expected to grow at a 9.7% rate per annum over the next five years.

Profitability

CSCO’s trailing-12-month revenue is 19.52 times ANET’s. CSCO is also more profitable, with a 64.2% gross profit margin versus ANET’s 63.7%.

Also, CSCO’s ROE and ROTC values of 27.1% and 15.8%, respectively, compare with ANET’s 21.5% and 14.6%.

Valuation

In terms of non-GAAP forward P/E, ANET is currently trading at 32.73x, 98.1% higher than CSCO’s 16.52x. And CSCO’s 4.18x forward EV/sales is significantly lower than ANET’s 7.87x.

Also, in terms of forward EV/EBITDA, ANET’s 20.31x is 80% higher than CSCO’s 11.28x.

Thus, CSCO looks more affordable here.

POWR Ratings

While ANET’s has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, CSCO has an overall grade of B, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both CSCO and ANET have A grades for Quality, which is consistent with their significantly higher-than-industry profitability ratios.

CSCO has a B grade for Stability, which is justified given its 0.90 beta. ANET, in contrast,  has a C Stability grade. This is in sync with its relatively high 1.17 beta.

Of 55 stocks in the B-rated Technology – Communication/Networking industry, ANET is ranked #29, while CSCO is ranked #12.

Beyond what we’ve stated above, our POWR Ratings system has also rated both CSCO and ANET for Growth, Value, Momentum, and Sentiment.

Get all ANET ratings here. Also, click here to see the additional POWR Ratings for CSCO.

The Winner

Both CSCO and ANET are well-positioned to capitalize on the industry’s growth potential owing to the rapid digitization of virtually every sector. However, CSCO appears to be a better buy based on its low valuations and higher profitability.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology – Communication/Networking industry. 

CSCO shares were trading at $52.36 per share on Friday afternoon, down $0.49 (-0.93%). Year-to-date, CSCO has gained 18.80%, versus a 11.34% rise in the benchmark S&P 500 index during the same period.