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Cisco Stock: A Glimmer of Value
Stock Analysis & Ideas

Cisco Stock: A Glimmer of Value

Shares of old-school networking technology firm Cisco (CSCO) have done a fairly reasonable job of holding their own amid the tech sell-off thus far.

As a tech and value play, Cisco is an intriguing value option that may be in a better spot to shrug off any further Nasdaq 100 volatility. Coming off a mixed Q1 2022 though, Cisco investors have their share of concerns.

Despite the recent earnings-induced weakness, which can be partially pinned on COVID-induced supply chain woes, I remain bullish on CSCO stock and think the pullback is overdone.

Cisco Stock and the Return of Value Tech

Cisco is a profitable company that can be grouped into the value category. The firm is not at all exciting, with its pretty flat top-line growth rate. Despite the firm’s unexciting recent past, there are things to look forward to as Cisco gets its groove back.

The company has a pathway to bring its growth to the low-to-mid single-digit levels. Combined with margin expansion potential, a potential enterprise spending recovery and tailwinds from the continued rise of hybrid work, the stage looks set for Cisco to shine, as its higher-growth peers lose their luster.

For the first quarter, Cisco’s 8% in year-over-year sales growth missed the mark. Thanks to ongoing global supply chain problems, margins also felt a bit of pressure.

With a pretty muted guide calling for slowing revenue growth, it wasn’t a mystery as to why Cisco stock flopped alongside its higher-growth peers in the tech sector, when as a value stock, it should have held its own better.

After such post-earnings punishment, I think Cisco is ready to move on. The recently lowered bar also bodes well for investors who missed the stock’s ascent off its 2020 lows.

Margins and Sales Growth on the Horizon?

Some investors were disturbed by the revenue miss, questionable margins and muted guide. That said, COVID headwinds on the supply chain may be closer to fading than many think. Cisco’s continued innovation on the integrated software front bodes incredibly well for margins.

As the supply chain inches closer towards normalization, it seems likely that the further margin pressures will be upward. For now, demand is holding steady, with orders surging across the board.

With such a strong order book, Cisco is well on its way to bouncing back from its latest correction, which has likely overswung to the downside as a result of the broader market correction.

As the company continues expanding its hybrid work offerings, with the latest unveiling of new innovations, including Wi-Fi 6E access points, it’s hard not to love the firm as a digital transformation play.

Although the firm’s modest growth suggests otherwise, the company is still innovating. In due time, such innovations should give a lift to the firm’s revenues. In the meantime, it’s all about making it through supply chain woes.

Valuation

At 4.6 times sales and 20.5 times trailing earnings, CSCO stock is the epitome of value tech. Though it may take some time to play out, I do think the 2.7% dividend yield is worth collecting for investors who want relative stability in a time of turbulence.

Versus industry averages, Cisco looks quite cheap. When you weigh the potential for margin and sales expansion over the next three years, a strong case could be made that Cisco stock is too cheap at $56 and change per share.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, CSCO stock comes in as a Moderate Buy. Out of 17 analyst ratings, there are nine Buy recommendations and eight Hold recommendations.

The average Cisco price target is $65.69, implying an upside of 16.8%. Analyst price targets range from a high of $73 per share to a low of $57 per share.

Bottom Line

Cisco may be a boring tech stock, but there are a lot of intriguing innovations going on behind the scenes.

As investors move on from the underwhelming quarter, and the firm continues navigating COVID headwinds, I think the stock could come out ahead, as high-multiple tech sinks.

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