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Headlines
- Cisco's stock has fallen by about 2% this year, while Palo Alto Networks has gained 13%.
- Cisco's Q4 FY'24 revenue is expected to be $13.56 billion, a 6% decrease from last year.
- Earnings per share are anticipated at $0.86, slightly above consensus but down from $1.08 last year.
Cisco Systems Inc (NASDAQ:CSCO) has had a challenging year, with its stock declining by approximately 2% since January, in contrast to Palo Alto Networks' 13% rise. As Cisco prepares to announce its Q4 FY'24 earnings, expectations are set for a revenue of $13.56 billion, marking a 6% decrease from the previous year, and an earnings per share of $0.86, which, although slightly ahead of consensus estimates, is down from $1.08 last year.
Cisco's product sales have slowed, as customers are still implementing products purchased in recent quarters. Additionally, major corporations, including cloud service providers and telecommunications companies, have paused network-related capital expenditures due to economic uncertainties. The company is also facing increased competition from smaller networking firms, further impacting growth. In Q3 FY'24, Cisco's revenue dropped by nearly 13% year-over-year to $12.7 billion, with adjusted earnings at $0.88 per share. However, Cisco has noted that demand seems to be stabilizing as customers work through their existing inventory, suggesting potential improvement for technology stocks starting from Q4.
A significant development for Cisco is its recent acquisition of Splunk, a software company specializing in data analysis and cybersecurity using artificial intelligence. Q4 FY'24 will be the first full quarter since the deal's closure, and updates on the integration will be closely watched. Cisco plans to leverage Splunk's offerings to enhance revenue synergies, having identified around 5,000 existing customers who could benefit from Splunk's products.
Cisco has shown progress in improving gross margins, driven by lower freight and component costs, a favorable product mix, and better cost management. In Q3 FY'24, gross margins increased to 65%, up 170 basis points from the previous year. This trend is expected to continue in Q4. The company's shift toward a recurring revenue model through software subscriptions and service contracts is also contributing to margin improvements. Last quarter, Cisco's total annualized recurring revenue reached $29.2 billion, including $4.2 billion from the Splunk acquisition.
Despite these efforts, Cisco's stock performance has lagged behind the broader market. Since January 2021, CSCO stock has gained about 8%, compared to a 46% increase for the S&P 500. In comparison, Arista Networks, another key player in the networking sector, has seen its stock soar by about 300% over the same period, benefiting from its strong position in high-speed networks and the growing demand for generative AI technologies.
Looking ahead, Cisco's current valuation, trading at around 13 times consensus earnings for FY'24, appears reasonable. Although growth for this year may be modest, the company's strategic moves toward a recurring revenue model and a stronger focus on cybersecurity through acquisitions could support its performance. Additionally, Cisco's lower valuation and ongoing digitization and networking trends may offer resilience in the face of potential economic downturns. With these factors in mind, Cisco's stock is valued at approximately $55 per share, about 20% above its current market price. For more detailed insights into Cisco's valuation and revenue streams, further analysis is available.
