Note: Cisco’s FY 2024 ended July 27, 2024
Cisco Systems Inc (NASDAQ: CSCO), a company providing networking equipment, security, collaboration, and cloud management services, grew marginally by 0.8% on Wednesday, 13th November to $59, as compared to flat growth in the S&P 500 index. In comparison, CSCO’s peer Alphabet stock (NASDAQ: GOOG) has seen its stock down 1.5% to around $180 on the same day. The company reported $13.8 billion in revenue (in line with guidance) in the fiscal first quarter, representing a 6% decline year-over-year (y-o-y). Despite a revenue decline this quarter, the company’s stock is up 17% so far ytd. Its AI infrastructure investments and product order growth (up 20% y-o-y in Q3) are a big win for the company. Cisco’s Q1 earnings per share stood out, with a GAAP EPS of $0.68 and a non-GAAP EPS of $0.91, both surpassing earlier guidance, driven by robust gross margins and favorable tax effects.
For the second quarter, Cisco provided a steady outlook, projecting Q2 revenue between $13.75 billion and $13.95 billion and non-GAAP EPS of $0.89 to $0.91. These numbers demonstrate expectations of a stabilization phase, fueled by recent strategic changes, with AI and security tools poised for significant growth. The company raised its full-year revenue forecast to between $55.3 billion and $56.3 billion, from $55 billion to $56.2 billion previously. It also lifted its earnings per share projection to between $2.26 and $2.38, up from $1.93 to $2.05.
The increase in CSCO stock over the last 3-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 46% in 2021, -22% in 2022, and 9% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 each year over the same period.
Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could CSCO face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
Cisco’s Q1 segment performance was mixed, with security revenues doubling y-o-y, and networking revenues declining 23% y-o-y. Broadly, its product revenue declined 9%, while service revenue increased 6%, highlighting the industry’s shift towards service-centric solutions. Cisco’s product sales have witnessed a slowdown as customers have been focused on installing and implementing the products purchased over the last few quarters. Moreover, large companies, including cloud service providers and telecommunication players, have held back on network-related capital expenditures on account of economic uncertainty. Separately, Cisco is also facing competition from smaller networking companies and this is also impacting growth. The company’s financials revealed varied regional outcomes as well. In Q1, the company’s revenue in the Americas and EMEA (Europe, Middle East, Africa) declined, contrasting with APJC’s (Asia Pacific, Japan, and China) modest growth.
Cisco has been making progress with gross margins in recent quarters, driven by lower freight and component costs, a favorable product mix, and overall better cost management. On a GAAP basis, CSCO’s total gross margin, product gross margin, and services gross margin were 65.9%, 65.1%, and 68.0%, respectively, as compared with 65.2%, 64.5%, and 67.3%, respectively, in the first quarter of fiscal 2024. We could see similar trends over Q2 as well. The company has been increasingly pushing toward a recurring revenue model with its software subscriptions and service contracts which could also help margins.
Cisco’s recent purchase of Splunk underscores its commitment to expanding its security offerings. This move aligns with the company’s broader strategy to bolster its capabilities in AI-driven threat detection and response. The company intends to cross-sell Splunk products to drive revenue synergies, indicating that it has identified about 5,000 existing Cisco customers that could also become Splunk customers. Splunk is a software player that provides tools to analyze log files, and other data, using artificial intelligence to help companies minimize the risk of cybersecurity incidents.
We believe CSCO stock is appropriately priced at current levels. The stock trades at just about 23x consensus earnings for FY’25. We think this is a reasonable valuation, even though growth for this year is likely to be muted. Cisco’s push into the recurring revenue model and its increasing focus on cybersecurity, via acquisitions, could help the stock. We also believe that the company will perform better than its big tech peers in the event of a potential economic downturn given its lower valuation and the secular spending trends on digitization and networking. We value CSCO stock at about $57 per share, which is in line with the current market price. See our analysis of Cisco Valuation for a closer look at what’s driving our price estimate for the stock. Also, check out our analysis of Cisco Revenue for more details on the company’s key revenue streams.
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