Cisco (NASDAQ:CSCO) Stock: Great Value, but Competition is Heating Up
Stock Analysis & Ideas

Cisco (NASDAQ:CSCO) Stock: Great Value, but Competition is Heating Up

Story Highlights

Cisco’s investment case looks good, with improving results and an optimistic outlook from management. The company’s shares offer notable upside with earning-per-share growth, dividend growth, buybacks, and possible valuation tailwinds pointing to attractive future returns. However, growing competition could impact Cisco’s future returns, which investors should take into consideration.

Cisco Systems (NASDAQ:CSCO), the global leader in networking technologies, is offering great value at its current price levels. Increasing competition, however, could put a dent in the company’s future cash flows, which could impact its long-term outlook. Therefore, investors may want to take a closer look at the company’s prospects before jumping in. I am neutral on Cisco Systems.

In this article, I will go over the following:

  • Cisco Systems’ most recent performance highlights
  • The stock’s total-return outlook
  • Whether Cisco can keep thriving against rising competition

Highlights from Cisco Systems’ Recent Results

Cisco Systems has been delivering robust results lately, driven by the ever-rising demand for network devices, cybersecurity solutions, and Internet of Things (IoT) technology. Despite Cisco being a very mature company, it still dominates this space and continues to innovate within connectivity technologies, driving decent growth.

In its most recent Fiscal Q2-2023 results, the company posted total sales growth of 7% to $13.6 billion and record adjusted net income of $3.6 billion, or $0.88 per share. Growth was driven by demand strength across the board, with total Product revenue reaching $10.2 billion, up 9%, and Service revenue improving slightly, yet again, by 2% to $3.4 billion.

The company is also making impressive strides in its revenue mix by successfully shifting towards a more sustainable model. Particularly, it’s been growing its recurring revenues at a satisfactory rate, which is a promising sign for securing its dominance over the long term.

Annual Recurring Revenues (ARR) came in at $23.3 billion, up 6% year-over-year, with product ARR growth coming in at 11%. Total Software revenues were $4.2 billion, up 10% compared to Fiscal Q2 2022, with Software Subscription revenues growing 15%. Consequently, 84% of the software revenue is now subscription-based, 4% higher than the prior-year period.

Finally, Cisco impressed investors and analysts alike by providing superb guidance for the full year. For Fiscal 2023, management raised its forecast, expecting year-over-year revenue growth to be in the range of 9% to 10.5%. Adjusted earnings-per-share is also expected to land between $3.73 to $3.78. At the midpoint, it suggests year-over-year growth of 11.9%, which is utterly impressive given the current macroeconomic outlook.

Cisco Systems’ Total-Return Outlook

Cisco System’s total-return outlook appears very compelling, driven by the following:

  • Strong earnings-per-share growth
  • A growing dividend
  • Substantial share buybacks
  • The potential for valuation multiple expansion

Specifically, even if Cisco is to experience a notable deceleration in earnings-per-share growth to the mid-single digits, that would still be an attractive rate of growth given that this is a value stock offering lofty capital returns.

Speaking of which, a day before releasing its fiscal Q2 results, Cisco increased its dividend by one cent to a quarterly rate of $0.39. That’s a soft pace of dividend growth, but it’s worth noting that it marked the company’s 13th consecutive annual dividend increase, while the yield already stands at a decent 3.1%.

Combined with Cisco’s share repurchases, investors are subject to significant capital returns. For context, Cisco has reduced its share count by 43% over the past 20 years, gradually building shareholder value and helping boost earnings per share.

Finally, total returns could be powered by a reasonable valuation expansion. Based on the midpoint of management’s adjusted earnings-per-share outlook, shares of Cisco trade at a forward P/E of 13.6. Given that Cisco has historically traded at a P/E in the mid-to-high teens and that a growing chunk of its revenues is becoming recurring, a multiple expansion to a P/E toward 15-16 is entirely reasonable.

Is CSCO Stock a Buy, According to Analysts?

Turning to Wall Street, Cisco Systems has a Moderate Buy consensus rating based on eight Buys, nine Holds, and one Sell rating assigned in the past three months. At $59.63, the average Cisco Systems stock forecast implies 17.45% upside potential.

Can Cisco Keep Thriving Against Rising Competition?

Cisco’s total-return outlook appears attractive, while Wall Street analysts forecast further upside for the stock. However, can the company keep thriving in the face of rising competition?

There is one company in particular that threatens Cisco’s core connectivity product line. It’s Arista Networks (NYSE:ANET), which competes with Cisco for market share in network switches and other networking equipment.

Arista was founded in 2004 by a former Cisco executive, Andy Bechtolsheim. The company’s initial focus was on providing high-performance switches for high-frequency trading environments, but it has since expanded its product line to include a broader range of network switches and related products.

Arista has been recognized for its innovation and has won multiple awards for its products, with high-speed networking products and competitive pricing eating Cisco’s lunch over the past few years. For context, the company’s revenues grew by 54.7% to $1.28 billion in Q4.

Further, Arista’s market share in the High-Speed Data Center Switching Market grew from 3.5% in 2012 to 23.1% in H1-2022, while Cisco’s market share declined from 78.1% to 39.4% over the same period. Thus, while Cisco’s investment case appears enticing on many fronts, Arista’s gradual market share gains should be taken into account before jumping into Cisco’s bullish case.



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