Is Cisco Undervalued At $46, Amid Network Recovery And Splunk Revenue Upside?

+12.35%
Upside
48.52
Market
54.51
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CSCO
Cisco

Cisco Systems Inc (NASDAQ: CSCO) stock has underperformed this year, falling by about 9% since early January. Cisco’s product sales have seen 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 been holding back on networking spending amid some economic uncertainty.  Separately, Cisco is also facing competition from smaller networking companies and this is also impacting growth. Over Q3 FY’24, Cisco saw its revenue decline by almost 13% year-over-year to $12.7 billion, with adjusted earnings coming in at $0.88 per share.

CSCO stock has seen little change, moving slightly from levels of $45 in early January 2021 to around $45 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period.
Overall, the performance of CSCO stock with respect to the index has been lackluster. Returns for the stock were 42% in 2021, -25% in 2022, and 6% in 2023. In comparison, Arista Networks (NYSE:ANET), another networking company has seen its stock surge by over 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which 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. Now, will Cisco stock fare better going forward?

Cisco indicates that demand could be stabilizing. The company’s Q4 guidance was better than expected, with the company projecting that sales for the year ending July would be between $53.6 billion and $53.8 billion, up from a previous forecast of $51.5 billion to $52.5 billion. Cisco has been making progress with gross margins in recent quarters, led by lower freight and component costs, a favorable product mix, and overall better cost management. Over Q3  FY’24, gross margins rose to 65% up 170 basis points compared to the year-ago period. Cisco’s big push into cybersecurity could also help the company drive growth. In March, the company closed a deal to buy Splunk, 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. Cisco will also cross-sell Splunk products to drive revenue synergies, indicating that it has identified roughly 5,000 existing Cisco customers that could also become Splunk customers. Cisco has been increasingly pushing toward a recurring revenue model with its software subscriptions and services contracts.  Over the last quarter, total annualized recurring revenue stood at $29.2 billion including $4.2 billion from its acquisition of Splunk.

Relevant Articles
  1. Will Higher Software Sales, Splunk Deal Drive Cisco Stock Back To $60?
  2. With Product Sales Sluggish, What To Expect From Cisco’s Q3 Earnings?
  3. Down 6% In Last 3 Months, Will Cisco Stock See A Recovery Following Q2 Results?
  4. Why Is Cisco Buying Splunk?
  5. Why The Digital Infra Theme Continues To Outperform
  6. What To Expect As Cisco Publishes Q3 Earnings?

We believe CSCO stock is somewhat undervalued at current levels. The stock trades at just about 13x consensus earnings for FY’24. 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 $55 per share, which is about 20% 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 Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 CSCO Return -1% -9% 52%
 S&P 500 Return 4% 15% 144%
 Trefis Reinforced Value Portfolio 4% 8% 666%

[1] Returns as of 6/19/2024
[2] Cumulative total returns since the end of 2016

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