Looking ahead, networking heavyweight Cisco (CSCO) is expected to benefit from favorable year-on-year comparables. Increased spending from Enterprise, Cloud, and Service Providers are proving to be a boon for the company.
It recently held an Investor Day event, and highlighted its efforts to accelerate its ongoing transformation from a software company to a software-as-a-service (SaaS) company. Discussion on additional TAM (total addressable market), and growth in Software and Subscription were also touched upon.
A strong balance sheet with high cash, low debt, and ample free cash flow is a major positive. Moreover, it has an attractive share repurchase program that pays healthy dividends to investors. (See Cisco Dividend Date and History on TipRanks)
Nonetheless, Needham analyst Alex Henderson pointed out some bearish points which make me neutral on the stock.
First off, according to Henderson, Cisco’s cloud-centric platforms seem to be lagging behind its competitors, who are constantly modernizing their software and technologies. The faster inclusion of AI (artificial intelligence) in competitor platforms compared with Cisco’s platform is another concerning trend.
Further, Henderson is also worried about what the long-term will bring once the favorable comparables of the upcoming few quarters normalize. Even though Cisco’s 5% to 7% growth projections for both the top and bottom lines for the calendar year 2025 are more or less in line with the Street consensus, the question of lack of leverage rose in the analyst’s mind.
The company blames an expected increase in component costs as an explanation. However, the analyst believes that the cost issue should smooth out by 2025.
Moreover, the company is increasing its prices to mitigate the cost pressures, which does not sit well with Henderson.
Again, the analyst believes that most people tend to choose a separate service dedicated to addressing a specific business concern. For instance, he thinks people would rather choose Zoom (ZM) than Webex, Palo Alto’s (PANW) security solutions over Cisco Security, or Okta’s (OKTA) identity platform than Duo’s.
Henderson assigned a Hold rating on the stock, and refrained from assigning any price target. “The stock could get a lift as it produces improved revenue over the year-ago declines in the comparisons. We hesitate to call this growth,” he explained.
However, Wall Street seems to be cautiously optimistic on Cisco, with a consensus rating of Moderate Buy, based on 11 Buys and nine Holds. The average Cisco price target of $62.88 indicates an upside potential of 9.7%.
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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.
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