Cisco Systems, Inc. (NASDAQ: CSCO) is just not what it used to be. Its stock may be close to challenging multi-year highs, but its stock chart shows that it still hasn’t taken out its highs from the 2,000 Dot-Com Bubble. The company is still an integral part of everyday web traffic all over the world. Cisco just isn’t growing and when it does grow it’s just not by enough to entice many new investors on the heels of recent gains.
Cisco earnings fell by 18% to $0.91 per share after a one-time tax benefit, and total revenue fell by 6% to $13.8 billion for the quarter. It now sees full fiscal year 2025 revenue coming in a range of $55.3 billion to $56.3 billion. That is up from a previous forecast of $55 billion to $56.2 billion, with the new forecast including $1 billion of artificial-intelligence-driven product orders.
It may seem unfair to pick on a company when they just beat expectations of revenue and profits. The problem is that this is yet another quarter of year-over-year declining sales, which now seems to be a streak, and while guidance is higher it’s not very robust. Cisco has continued to make acquisitions over time and it is investing in A.I.
Some investors may be more prone to thinking that its cheap valuation and its above-peer dividend is just too good to pass up. Keep in mind that most stocks that look “cheap” are cheap for a reason.
Cisco is now selling data center servers equipped with chips from NVIDIA Corporation (NASDAQ: NVDA) for processing artificial-intelligence workloads. This puts it up against the likes of Dell and Hewlett-Packard Enterprise. Both Jefferies and Raymond James are incrementally positive on Cisco’s AI position and if you back out Splunk the overall product orders were up 9% this quarter after a 6% rise in the prior quarter.
SOME CAUTION
The team at William Blair is concerned about Cisco’s competitive positioning against competition across its major product families. This caution is despite it seeing an improving demand environment for networking, incremental tailwinds from IA and solid growth at Splunk. The note also warned of weaker than anticipated global economic growth and a risk of market share losses. And while the acquisition of Splunk is currently, the team worries that it adds yet another layer of integration risks.
A FRESH UPGRADE
JPMorgan was the most recent analyst upgrade seen on Cisco Systems. The firm now rates it as Overweight with a $66 price target, up from a prior Neutral and $55 target. JPMorgan sees an earnings boost from enterprise networking demand and room for an additional valuation (multiple) lift. Its more recent investments into security could also spark growth even if it remains a wild card at this time.
Here are some other ratings that were maintained but with a bump higher in the price targets:
- Barclays (Equal-Weight) target to $56 from $49
- BofA (Buy) target to $72 from $60
- Citi (Buy) target to $64 from $62
- Goldman Sachs (Neutral) target to $56 from $51
- Morgan Stanley (Overweight) target to $62 from $58
- Piper Sandler (Neutral) target to $57 from $52
- UBS (Neutral) target to $62 from $55
- Wells Fargo (Equal-Weight) target to $60 from $57
Morningstar has a mere $50.00 fair value estimate for Cisco. The research firm likes Cisco ’ s emerging growth from artificial intelligence networking infrastructure, but is not expecting it to be a massive driver. Morningstar also warns that Cisco is not expected to hold a strong market share among AI networks.
A PRIOR UPGRADE
Citigroup raised Cisco’s rating to Buy from Neutral in mid-October and raised its target to $62 from $52 in the call at that time. Citi’s Atif Malik believes Wall Street is missing the point as its revenue and valuation should get an AI-boost from only about 2% of current revenues. Cisco has more opportunities as it grows into the ethernet AI market and its future earnings multiple should rise to about 16 in a year versus 14.9-times today and still at about a 30% discount to peers.
CISCO PERPETUATES ITS BUYBACKS & DIVIDENDS
Cisco currently has $18.7 billion in cash for liquidity, a rainy day, for acquisitions, and/or for returning capital to its shareholders. The company’s Remaining Performance Obligations of $40.0 billion was up 15% in total and was listed as being 51% to be recognized as revenue over the next 12 months. Its deferred revenue of $27.5 billion was up 7% in total. This almost assures plenty of free cash flow ahead.
The networking giant repurchased approximately 40 million shares of its common stock in the quarter at an average price of $49.56 per share. That was roughly $2 billion spent on buybacks and the company still has $3.2 billion available for buybacks under its current plan with no expiration date.
Cisco has spent $1.6 billion in dividends, and that dividend has slowly grown each year over the last decade. The current dividend yield is 2.7% based on a $1.60 annualized payout and that is currently less than half of its adjusted earnings per share. This is among the highest technology stock dividend yields in the entire S&P 500.
WAS THE REACTION RIGHT?
Cisco’s post-earnings reaction in mid-day trading was down less than 2% at $58.15. Its 52-week range is $44.50 to $59.38. What made Cisco’s earnings more difficult to peg in the aftermath of its report is that the stock had just received a 4% bump in the “Trump Effect” in stocks. And with that, it was up about 20% in the last 90-day period even if it’s up just 15% so far for 2024.
Cisco’s peak above $60 was at the end of 2021 and start of 2022, and this was also quite close to its consensus analyst price target. Most of the last 18-month period has been in a range between $45 and $55 for the stock. As long as that level holds then the bulls probably have something tangible to hold on to for coming gains in A.I. If the stock consolidates further, it seems that shareholders can just stay used to another trading range until the next major cycle.
It is just no longer to see waves of analyst upgrades and downgrades in Cisco either. Much of the business runs steady, which may account for why it was able to eliminate another 6,000 people (about 7%) from its workforce in the latest restructuring effort to lower costs.
DISCLAIMER
Oggonomics does not have a formal rating nor does it have any formal price target on Cisco Systems. None of the information herein is to be considered investment advice and this is not a recommendation to buy or sell any of the securities mentioned. All investment decisions are up to each investor and those decisions should be made with a financial advisor.
