Cisco Systems CSCO shares have returned 11% in the past three months, underperforming the Zacks Computer & Technology sector’s drop of 4.4%.
The outperformance can be attributed to CSCO’s improving near-term prospects, with strong AI-related order growth.
Cisco shares are also trading above the 50-day and 200-day moving averages, indicating a bullish trend.
For fiscal 2025, revenues are expected between $55 billion and $56.2 billion. Cisco reported revenues of $53.8 billion in fiscal 2024.
CSCO’s 3-Month Price Performance
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $55.61 billion, suggesting 3.36% year-over-year growth.
CSCO Shares Trade Above 50-Day & 200-Day SMA
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Cisco’s FY25 Earnings Outlook Disappoints
CSCO’s earnings outlook is disappointing. Non-GAAP earnings are anticipated between $3.52 and $3.58 per share. CSCO reported non-GAAP earnings of $3.73 per share for fiscal 2024.
The consensus mark for earnings is pegged at $3.71 per share, unchanged over the past 30 days, indicating a 4.63% year-over-year decline.
Cisco Systems, Inc. Price and Consensus
Cisco Systems, Inc. price-consensus-chart | Cisco Systems, Inc. Quote
Its prospects are further challenged in the AI-driven networking space due to stiffening competition aggravated by Hewlett Packard’s HPE pending deal to acquire Juniper.
How should investors play the networking giant? Are a strong portfolio post the Splunk acquisition and robust AI-related orders enough to jump into the stock or should they worry about the company’s lower earnings growth potential in fiscal 2025?
Let us dig deeper to find out.
Cisco’s Long-Term Prospects Ride on Innovation
The increase in AI-related workload presents a strong long-term opportunity for Cisco, thanks to an innovative portfolio. Total growth opportunity is expected to be $950 billion, with current markets expected to witness a CAGR of 6% and expansion markets likely to see a CAGR of 16% between 2025 and 2027 timeframe.
Cisco’s aggressive investments in AI, cloud and cyber security are noteworthy. It currently has more than $1 billion in AI orders from hyperscalers, with more than $1 billion in orders in the pipeline for fiscal 2025.
The Security segment is particularly noteworthy, with solutions like XDR, Secure Access and Multicloud Defense suites that are winning customers. Current markets are expected to witness a CAGR of 8% and expansion markets are likely to see a CAGR of 14% between the 2025 and 2027 timeframe. The Splunk acquisition is expected to further boost CSCO’s prospects in the domain, with addressable markets worth $118 billion.
In the infrastructure domain, Cisco’s addressable market is expected to be $221 billion. CSCO has been benefiting from the growing use of AI and cloud with the ongoing digital transformation happening at enterprises.
Recovery in Networking demand bodes well for Cisco. Its switching, routing, security and observability are enabling customers to automate network operations with cutting-edge innovations like AI-powered robotics and unmatched supply-chain visibility. Investment in AI operations and autonomous networks by service providers is helping customers monetize B2B offerings.
Strong Partner Base Drives CSCO’s Prospects
Cisco’s expanding partner base, including the likes of Microsoft, NVIDIA NVDA, Lenovo and AT&T T, deserves attention.
The Cisco-NVIDIA partnership has introduced the Cisco Nexus HyperFabric AI cluster solution, a new end-to-end infrastructure designed to scale generative AI workloads efficiently.
Cisco is collaborating with AT&T to introduce a seamless digital buying experience for businesses, offering 5G Fixed Wireless Access through the Meraki MG52 and MG52E gateways.
Cisco Stock Overvalued Right Now
The Cisco stock is not so cheap, as the Value Score of C suggests a stretched valuation at this moment. Its modest growth prospect does not justify this premium.
CSCO is trading at a premium, with a forward 12-month P/S of 3.64X compared with the Zacks Computer Network industry’s 3.18X, reflecting a stretched valuation.
Price/Sales Ratio (F12M)
Image Source: Zacks Investment Research
Cisco Shares – Buy, Sell or Hold
Cisco’s expanding portfolio, a growing footprint in the cybersecurity domain and a strong partner base are the key catalysts despite a stretched valuation.
A strong liquidity position is expected to help Cisco maintain its dividend and share repurchase. In fiscal 2024, the company returned $3.6 billion to shareholders, including share repurchases worth $2 billion. It paid out dividends worth $6.38 billion.
Cisco currently carries a Zacks Rank #3 (Hold), which implies that investors should wait for a better entry point into the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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