Cisco (NASDAQ: CSCO) is often considered a slow-growth mature tech stock, yet it rallied more than 20% as the S&P 500 rose just 3% this year. Let's discuss why Cisco's stock outperformed the market, and whether or not that momentum will continue next year.

Reviewing Cisco's growth

First and foremost, Cisco's revenue and earnings growth cleary improved over the past four quarters.

YOY growth. *Non-GAAP. Source: Cisco quarterly reports.

Cisco's full-year revenue rose 3%, and its earnings grew 9%. Analysts expect its revenue and earnings to grow 5% and 15%, respectively, this year. That's an impressive growth rate for a stock that trades at just 14 times forward earnings.

Image source: Getty Images.

How did Cisco turn things around?

Cisco's growth might seem surprising since the company still generates most of its revenue from networking routers and switches.

Cisco still controlled over half of the ethernet switch market during the second quarter of 2018, according to IDC, but its share of the high-growth 25Gb/50Gb/100Gb market fell to 34.6%, compared to 41.2% a year earlier. Cisco's shares of the service provider and enterprise router market also fell from 41% to 35.7%.

Those declines are reflected in the anemic 2% growth of its Infrastructure Platforms revenues (which accounted for 57% of its top line) in 2018. Sales of Cisco's traditional routers remained weak, but it offset some of that weakness with stronger sales of switches in the enterprise campus market, its Meraki and Wave 2 wireless products, and its servers and HyperFlex products for data centers.

But more importantly, Cisco continued to expand its higher-growth Applications and Security divisions (which together accounted for 15% of its 2018 sales) with new products, acquisitions, and bundling strategies. Those moves boosted its Applications and Security revenues by 10% and 9%, respectively, in 2018.

Image source: Getty Images.

Cisco also focused more on increasing its revenue from recurring services. By the fourth quarter of 2018, Cisco's recurring services revenue accounted for 32% of its top line, compared to 31% in the prior year quarter.

That gradual shift -- which was supported by Cisco's expanding ecosystem of security, collaboration, and other software services -- locked in customers and widened its moat against aggressive challengers like Arista Networks (NYSE: ANET).

Arista is often cited as a disruptive threat to Cisco, since it sells cheaper switches optimized for networks that run on its open-source cloud-based OS. IDC reports that Arista's share of the switching market rose from 5.5% to 6.6% between the second quarters of 2017 and 2018, with 100Gb switches accounting for nearly 60% of its revenues.