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Pro Research: Wall Street dives into Cisco's strategic moves

Published Dec 04, 2023 13:44
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In the ever-evolving world of technology, Cisco Systems (NASDAQ:CSCO), Inc. stands as a stalwart, navigating through the currents of change with strategic acquisitions and a focus on software-driven revenue. However, the networking giant's journey is not without its challenges, as industry analysts have observed some turbulence that could affect its trajectory.

Company Overview and Market Performance

Cisco, a major player in IT Hardware and Communications Equipment, has recently made headlines with its intent to acquire Splunk (NASDAQ:SPLK) Inc., a move poised to bolster its offerings in security, AI, and observability. This strategic decision is expected to enhance Cisco's position with large customers and increase its recurring software revenue, which is a positive sign for the company's future.

Despite this, Cisco's stock has experienced volatility. After-hours trading saw a decline of over 10%, attributed to a downward revision of annual guidance by 6%, marking the third such cut. This adjustment reflects concerns about an enterprise slowdown and weak orders, which could persist rather than rebound as previously hoped. Analysts are wary, suggesting that the market's expectations for Cisco for 2024-2025 may be overly optimistic.

Financial Performance and Analysts' Ratings

Cisco's recent financial results have been a mixed bag. For F1Q24, the company reported earnings per share (EPS) of $1.11 on revenues of $14.7 billion, surpassing estimates. However, the guidance for F2Q24 and FY24 was significantly below consensus, leading to a share price decline. Analysts have adjusted their ratings and price targets accordingly, with one firm setting a target at $50 and another at $46, both decreases from previous targets.

Competitive Landscape and Industry Trends

The networking sector is facing a downcycle, which could negatively impact Cisco and its peers. The company is contending with stiff competition from firms like Arista, which is vying for market leadership in ethernet AI networking. Cisco's ability to gain share in key growth infrastructure markets remains a concern, despite recent momentum in areas like AI networking.

Strategic Acquisitions and Prospects

The acquisition of Splunk is seen as a medium-term benefit, enhancing Cisco's capabilities in observability and AI networking. Cisco has over $1 billion in AI networking projects in sight for FY25, indicating a strong focus on this emerging market. The company also boasts record gross and operating margins, reflecting cost management and a shift to high-margin software.

Bullish and Bearish Perspectives

On the bullish side, Cisco's leadership in the nascent webscaler AI networking market and strong performance in the observability technology segment and SMB sector are seen as significant growth opportunities. However, the bearish view points to concerns about Cisco's ability to gain share in key markets and the potential impact of the Splunk acquisition on financial flexibility.

Bear Case

Is Cisco's enterprise slowdown a long-term concern?

The repeated reductions in Cisco's annual guidance and the significant decline in orders suggest a protracted enterprise slowdown. Analysts note that customers' excess inventory and the normalization of backlogs could lead to a sustained period of weak orders. The company's efforts to navigate through these headwinds include a focus on AI networking and observability, but the full impact of these strategies on reversing the slowdown remains to be seen.

Can Cisco maintain its market position amid competitive pressures?

Cisco faces increasing competition in the networking industry, with competitors potentially gaining market share. The company's ability to maintain its leadership position is challenged by the need to innovate and adapt to changing market demands. While Cisco's acquisition of Splunk could provide a competitive edge, integration risks and the potential dilution of focus within crowded markets like SIEM, APM, and NPM add to the uncertainty.

Bull Case

Will Cisco's strategic focus on software revenue pay off?

Cisco's acquisition of Splunk is expected to significantly expand its software revenue, aligning with broader industry trends that favor Cisco's solution sets. Analysts are optimistic about the long-term benefits of this strategic focus, as it leverages Cisco's strong customer base and aligns with the shift towards recurring revenue models.

How will Cisco's AI networking projects impact its growth?

With a clear aim to dominate the AI networking space, Cisco has set its sights on achieving $1 billion in AI-related orders by FY25. This ambition, coupled with the company's strong performance in F1Q24 and high gross margins, presents a bullish case for Cisco's growth potential in the second half of the fiscal year and beyond.

SWOT Analysis

Strengths:

  • Leadership in AI networking and observability technology.
  • Strong financial performance with high gross and operating margins.
  • Strategic acquisition of Splunk to enhance software offerings.

Weaknesses:

  • Repeated downward revisions in annual guidance.
  • Inventory buildup leading to order declines.
  • Integration risks associated with the Splunk acquisition.

Opportunities:

  • Growth potential in the webscaler AI networking market.
  • Shift to high-margin software and recurring revenue models.

Threats:

  • Downcycle in the networking industry.
  • Competitive pressures from peers in key growth markets.

Analysts Targets

  • Piper Sandler: Neutral rating, price target of $50 (November 16, 2023).
  • JMP Securities: Market Perform rating (November 16, 2023).
  • Barclays (LON:BARC): Equal Weight rating, price target of $46 (November 16, 2023).
  • Morgan Stanley (NYSE:MS): Positive outlook indicated (++), specific price target not provided (November 16, 2023).
  • Raymond James & Associates: Market Perform rating (October 30, 2023).
  • Evercore ISI: Outperform rating, price target of $55 (November 16, 2023).
  • KeyBanc: Sector Weight rating (September 22, 2023).
  • Deutsche Bank (ETR:DBKGn): Hold rating, price target of $54 (November 16, 2023).

This article is based on analysis from September to November 2023.

InvestingPro Insights

As Cisco Systems, Inc. continues to adapt to the dynamic technology landscape, real-time data from InvestingPro provides a deeper look into the company's financial health and market performance. With a market capitalization of 194.48 billion USD and a P/E ratio of 14.39, Cisco is trading at a valuation that appears to be attractive, especially when considering its near-term earnings growth. The adjusted P/E ratio for the last twelve months as of Q1 2024 stands at a slightly lower 13.67, further underscoring the potential value for investors.

InvestingPro Tips highlight that Cisco has a perfect Piotroski Score of 9, which is a strong indicator of the company's financial stability. Additionally, Cisco's revenue growth has been accelerating, with a 10.99% increase over the last twelve months as of Q1 2024, demonstrating the company's ability to expand its sales in a competitive environment.

Subscribers to InvestingPro can access even more insights to inform their investment decisions. For instance, there are 18 additional InvestingPro Tips available for Cisco, including observations on the company's high earnings quality, with free cash flow exceeding net income, and its high return on invested capital. These insights can be invaluable for investors looking to understand the nuances of Cisco's financial performance and market position.

For those interested in gaining comprehensive access to these insights, InvestingPro is now offering a special Cyber Monday sale with discounts of up to 60%. Plus, use coupon code research23 to get an additional 10% off a 2-year InvestingPro+ subscription. This promotion is a timely opportunity for investors to enhance their research capabilities and make more informed decisions.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Pro Research: Wall Street dives into Cisco's strategic moves
 

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