Down 6% In Last 3 Months, Will Cisco Stock See A Recovery Following Q2 Results?

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Cisco Systems Inc (NASDAQ: CSCO) is poised to report its Q2 FY’24 results on February 14, reporting on a quarter that is likely to see the company’s sales contract, as customers focus on deploying hardware inventory purchased in the recent quarters.  We expect revenue for the quarter to come in at about $12.8 billion, coming in slightly ahead of estimates although this would mark a 6% decline compared to last year. We project that earnings will stand at about $0.85 per share, coming in marginally ahead of consensus estimates. So what are some of the trends that are likely to drive the company’s results for the quarter?

While Cisco was impacted by supply chain issues over Covid-19, these issues largely eased in 2023, with the company seeing strong product delivery over the last three quarters. For example, over Q1 FY’24, the quarter ended October 2023, revenue rose 8% year-over-year to $14.7 billion, with adjusted earnings per share also rising by about 29%. Over the quarter, networking product sales rose by 10% while observability sales – which include tools for monitoring the performance of networks – rose by 21%. However, Cisco has indicated that its customers were now focused on installing and implementing the products purchased over the last few quarters, noting that the inventory left over at customer’s locations could take one or two quarters to be fully absorbed. This is likely to impact revenue for Q2. On the margins front, Cisco has been making progress with overall gross margins rising to 65.2% in Q1 FY’24 up from 61.2% in Q1’23 as supply chain issues eased and component availability improved. For Q2, the company is guiding gross margins of between 65% to 66%. Cisco has been increasingly pushing toward a recurring revenue model with its software subscriptions and services contracts, and we will be tracking the company’s performance on this front. Over the last quarter, total annualized recurring revenue stood at $24.5 billion, up 5% year over year.

However, the increase in CSCO stock has been far from consistent. Returns for the stock were 42% in 2021, -25% in 2022, and 6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CSCO underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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 with high oil prices and elevated interest rates, 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?

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We believe CSCO stock is somewhat undervalued at current levels. The stock trades at just about 13x consensus earnings for FY’23. 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 the secular spending trends on digitization and networking. We value CSCO stock at about $56 per share, which is about 10% ahead of 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.

 Returns Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 CSCO Return 0% 5% 65%
 S&P 500 Return 2% 29% 121%
 Trefis Reinforced Value Portfolio 0% 38% 607%

[1] Returns as of 2/6/2024
[2] Cumulative total returns since the end of 2016

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