Shares of network equipment firm Cisco (CSCO) got hammered following the release of some sub-optimal quarterly results. Over the past week, shares slipped over 13%, bringing shares down around a third from where they were at their December 2021 peak.
As a value play in the tech sector, Cisco has done a relatively decent job holding its own up until its post-earnings flop. Now that the old-time tech darling has posted losses in line with the Nasdaq 100, there’s a real risk that CSCO stock could revisit the $35 per share lows of 2020. Indeed, Cisco has already ricocheted off the level twice. With the recent pick-up in negative momentum, it seems like Cisco’s pains are only just beginning.
With fears of a looming recession and an uncertain outlook, the stock seems to be flying into no man’s land. Despite recent woes, it’s tough to pass up on the value proposition, with shares trading at just 15.2 times trailing earnings. That’s an incredibly cheap multiple, even if there is some baggage. For this reason, I remain bullish on CSCO stock.
Cisco’s Quarter Weighed Down by the Supply Chain
Cisco’s third-quarter was heavily impacted by supply chain issues, causing the firm to clock in flat revenues year-over-year. Undoubtedly, pointing the finger at coronavirus-induced supply chain disruptions has been a common theme for over a year now. With the latest round of lockdowns in China, it shouldn’t have been too much of a surprise to see Cisco come up short in its latest round of earnings.
With the bar now lowered for the fourth quarter, many investors still seem unwilling to give the firm the benefit of the doubt. Given how unforgiving the market has been to firms that fumble on earnings, it’s not too much of a shocker to see so many investors rushing to the sidelines with expectations that even worse numbers could be in the cards.
Buying Quarterly Flops in Tech Stocks Has Proven Disastrous, Thus Far
Undoubtedly, buying the dip has fallen out of fashion this year. Companies like Netflix (NFLX) punished dip-buyers when it clocked in its second straight quarter of meager results.
Though Cisco is no Netflix, the magnitude of fear on Wall Street is almost palpable for the firms delivering anything short of a beat and raise. Even companies like Microsoft (MSFT), that beat and raised guidance have been unable to avoid the broader market’s pull lower of late.
Though it’s unclear when Cisco’s supply chain disruptions will subside, it’s more than likely that disrupted operations will ease in due time. Currently, Shanghai is slowly lifting restrictions, with expectations that lockdowns could lift in a matter of weeks. Such a reopening could be a catalyst for firms with supply chains dependent on China.
At the end of the day, Cisco provides essential hardware and software that could be key to fueling the ongoing digital transformation of the workplace. As long as demand stays robust in the face of a waning economy, it’s tough to give up on Cisco at today’s depressed multiples.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CSCO stock comes in as a Moderate Buy. Out of 20 analyst ratings, there are 10 Buy recommendations, nine Hold recommendations, and one Sell recommendation.
The average Cisco price target is $52.17, implying an upside of 18.57%. Analyst price targets range from a low of $40.00 per share to a high of $71.00 per share.
The Bottom Line on Cisco Stock
It’s hard to be a dip-buyer these days, especially with firms that deliver downbeat guidance.
Cisco’s forward-looking outlook was pretty downbeat. With broader fears of recession and coronavirus headwinds that continue to plague supply chains, it’s only prudent for management to err on the side of caution with regard to upcoming quarters.
It’s been unrewarding to chase fallen firms, given the magnitude of punishment that’s being doled out this past earnings season.
Still, it’s hard to ignore Cisco’s depressed valuation, even as Wall Street analysts lower their price targets.
The lifting of lockdowns in China may act as a mild catalyst for Cisco moving forward. However, the firm will need to be agile if it’s to avoid underwhelming its investors in the fourth quarter.
In any case, the risk/reward seems attractive now that there’s so much pessimism baked in. The road ahead will not be easy for Cisco, but it’s hard not to be enticed by the stock’s multiples.
At writing, CSCO stock trades at 3.5 times sales and 12.0 times forward earnings. Both multiples are below the five-year historical average multiples of 4.2 and 15.0, respectively. Undoubtedly, Cisco is a value stock that could find itself in deep value territory if its negative momentum doesn’t subside.
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