A Closer Look At Cisco’s Valuation
Cisco (NASDAQ:CSCO) has reported a decline in revenues in recent quarters, driven largely by low core product sales. Cisco has made large investments in fast-growing networking domains such as software-defined networking in order to offset the impact of stagnating revenues. Furthermore, the company has also increased its revenue dependence on its Network Security, Data Center and Collaboration segments. Cisco has also reported a fall in R&D and SG&A expenses, boosting profit margins. This trend is expected to continue through the end of the current fiscal year in June.
We have summarized our expectations for the company’s fiscal 2018 results on our interactive dashboard platform. Based on our expectations for FY’18 results, Cisco’s fair value is stands at just over $36 per share, which is below the current market price. If you think differently, you can change expected segment revenue and net margin figures for Cisco to gauge how changes will impact its value.
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Margins To Improve Despite Limited Increase In Revenues
Cisco’s infrastructure revenues include revenues generated from core hardware product sales including ethernet switches, routers, wireless-LAN products and other data center products such as unified systems and converged systems. These revenues have stagnated or mildly decline in recent years due to pricing pressure for standalone hardware. This has also resulted in compressing gross margins for the product segment. In addition, Applications revenues declined significantly through FY’16 and FY’17. This was mainly due to the company selling off its SP Video CPE segment at the end of FY’15.
On the other hand, Network Security revenues have continued to increase at around 10% annually in recent years. We expected the trend to continue through FY’18. Similarly, with revenues generated from most product revenue streams stagnating, services revenues have picked up due to the large aggregate customer base that Cisco has acquired over the years. We forecast Cisco to sustain mid-single digit growth in services revenues in the coming years.
To offset lower revenues, Cisco has managed to limit growth in operating expenses. Cisco’s R&D expenses fell from $6.3 billion in FY’16 to $6.1 billion in FY’17. As a result, the company’s net margin has expanded marginally to just over 25% in FY’17. We expect this to increase further to 26% in FY’18.
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