Source: PaxForex Premium Analytics Portal, Fundamental Insight
Cisco Systems is often regarded as a stable choice for conservative income investors, given its position as the world's largest networking company, trading at a modest 13 times this year's adjusted earnings and offering a substantial forward yield of 3.3%.
Despite these appealing attributes, Cisco's stock has exhibited minimal growth over the last 12 months, contrasting sharply with the S&P 500's robust 20% rally. The question arises as to why Cisco has underperformed the market by such a significant margin and whether it should be viewed as a value stock or potentially a value trap.
In fiscal 2020, concluding in July 2020, Cisco experienced a 5% decline in revenue due to the pandemic's disruption to its sales of networking hardware and software. Post-pandemic, the company saw only a marginal 1% revenue increase in fiscal 2021 and a 3% uptick in fiscal 2022, as supply chain constraints impeded sales of crucial components such as routers, switches, and wireless networking devices.
Despite these challenges, Cisco managed an impressive 11% revenue surge in fiscal 2023, successfully overcoming supply chain obstacles and meeting the market's pent-up demand for significant network upgrades. This recovery hinted at the potential for Cisco to surpass its long-term goal of achieving a compound annual growth rate (CAGR) of 5%-7% for revenue and adjusted earnings per share (EPS) from fiscal 2021 to fiscal 2025.
Regrettably, Cisco's growth trajectory has faced setbacks over the past two quarters, with both revenue and EPS witnessing declines in the second quarter of fiscal 2024. This development raises concerns about the sustainability of its earlier recovery and prompts investors to reevaluate Cisco's status in their portfolios.
Cisco attributes its recent slowdown to a surge in customer orders after overcoming supply chain challenges in fiscal 2023. However, the deployment of received shipments slowed down unexpectedly due to macroeconomic headwinds, prompting customers to curtail spending on major networking upgrades. Consequently, the demand for new networking devices experienced a sudden and steep decline.
The pressure on Cisco is anticipated to persist, with an expected year-over-year revenue decline of 16%-17% in the third quarter and 8%-10% for the full year. Cisco's strategic move to acquire Splunk, expanding its observability software business, is aimed at mitigating these challenges, with the deal slated to close in the first half of fiscal 2025.
Despite analysts projecting a 2% revenue growth to $53 billion in fiscal 2025, this falls significantly short of Cisco's long-term goal of 5%-7% growth from fiscal 2021. Cisco's revenue growth has stalled, but its adjusted gross and operating margins expanded in the first half of fiscal 2024. Lower costs and a favorable product mix boosted gross margins, while aggressive cost-cutting measures and the Splunk acquisition contributed to expanding operating margins.
However, Cisco expects a 14%-16% year-over-year decline in adjusted EPS for the third quarter and 4%-5% for the full year, driven by declining sales despite margin expansion. Analysts foresee a 4% rise in adjusted EPS in fiscal 2025, missing the company's long-term growth goal.
Facing cyclical challenges and fierce competition from networking giants like Arista Networks and Hewlett Packard Enterprise, Cisco might encounter hurdles in growth, margin compression, and the need for strategic acquisitions to fortify its position.
While Cisco's recent downturn may not be swiftly overcome, its low valuation and high yield make it less prone to severe downsides. Despite potential market underperformance until revenue and earnings growth accelerates Cisco remains a stable and profitable choice for investors seeking a secure haven with stable dividends, avoiding the pitfalls of a value trap. However, near-term expectations should be tempered, and investors must navigate through Cisco's performance until a resurgence in growth is observed.
As long as the price is above 50.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 51.39
- Take Profit 1: 55.00
- Take Profit 2: 58.00
Alternative scenario:
If the level of 50.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 50.00
- Take profit 1: 48.00
- Take Profit 2: 46.00
