Wall Street dissects Cisco’s market dynamics By Investing.com

In the dynamic and competitive landscape of the networking industry, Cisco Systems, Inc. continues to… (NASDAQ:) tops analyst discussions. The company, a leading IT and communications equipment company, has been navigating through strategic acquisitions and market shifts shaping its trajectory. Through a series of recent analyzes conducted by prominent financial firms, the investment community is closely monitoring Cisco's adaptations and forecasting its potential in the market.

Performance in different markets

Cisco's global presence in the networking sector is characterized by its strategic moves and product innovations. Despite the recession affecting the industry, Cisco has maintained its leadership position in key segments, including the emerging web-based AI networking market, which is expected to provide significant growth opportunities in the latter half of 2024 and beyond.

The company's financial performance remains resilient, with Q2 2024 EPS of $0.87 on revenue of $12.8 billion, beating Street estimates. However, guidance for Q3 2024 and FY24 was set below consensus, leading to lower aftermarket stock prices and concerns about Cisco retaining market share amid increased competition and a potential enterprise slowdown. Cisco's stock price was reported at $50.28 as of February 15, 2024, according to JMP Securities.

Product sectors and details

Cisco's product segments reflect a company in transition, with over $3 billion of AI networking projects underway, with a goal of securing at least $1 billion in orders. The company also achieved record gross and operating margins, demonstrating effective cost management and a strategic shift toward high-margin programs with improved pricing. However, orders slowed further in Q1 2024 due to increased inventory at customers, and Cisco expects inventory to return to normal within a quarter or two, with lead times and process backlogs already cleared.

Competitive scene

Cisco faces fierce competition from companies such as Arista Networks (NYSE:), which aims to lead the market in Ethernet AI networking by FY25. Wireless networking stock levels include players such as Extremist networks (NASDAQ:) and Cambium Networks (NASDAQ:), while in the observability market, entities like SolarWinds (NYSE:) can benefit from Cisco's performance in the SMB segment.

Market trends and regulatory environments

Market trends indicate weak demand for Cisco products, evidenced by a sharp decline in orders. Regulatory environments, although not specifically highlighted in recent analyses, continue to be a critical factor in the networking sector, which may impact Cisco's operations and competitive position.

Customer base and management strategy

Cisco's diverse customer base includes enterprise, service providers, cloud, and public sectors. The company's management strategy focuses on high-margin software and services, resulting in improved gross and operating margins. However, Cisco is managing a period of inventory absorption among customers, resulting in a temporary slowdown in new orders.

External factors and upcoming product launches

Macroeconomic conditions and competitive pressures have impacted Cisco's performance. Upcoming product launches, especially in AI networks, are expected to contribute to growth in the medium term. The acquisition of Splunk (NASDAQ:), completed for $28 billion, is a strategic move that is expected to have positive cash flow and margin accretion in FY25, with non-GAAP EPS accretion expected. In FY26.

Inventory performance

Cisco stock has seen volatility, with a recent decline after hours due to revised annual guidance and concerns about an enterprise slowdown. Analysts have issued different ratings and price targets, reflecting a cautious outlook on the company's near-term performance.

Analysts' expectations and their reasons

Analysts offer a range of forecasts for Cisco. JMP Securities maintains a market perform rating, citing lower guidance due to extended inventory digestion and restructuring efforts, including 5% layoffs. KeyBanc views the Splunk acquisition favorably and expects it will accelerate Cisco's revenue growth and expand GM's non-GAAP footprint. Barclays maintains an “equal weight” rating, acknowledging the potential for increased recurring revenue but expressing concerns about integration risks. Piper Sandler offers a “Neutral” rating with a $51 price target, and expects potential upside from the Splunk acquisition and AI data center initiatives.

Deutsche Bank maintains a “Hold” rating while raising its 12-month price target from $51 to $52 and adding Cisco shares to the Catalyst Call Buy list, indicating a more positive near-term outlook. Morgan Stanley resumes coverage with an “overweight” rating and a $58.00 price target, highlighting the valuation discount to the S&P 500 and the potential for double-digit shareholder returns. Citi Research maintains a “Neutral” rating with a price target of $52, and expects a temporary decline in estimates due to a stock correction and the impact of the Splunk acquisition.

Bear case

What challenges might Cisco face in the near term?

Cisco's near-term challenges center around slow digestion of excess inventory, which could impact orders and revenue growth. A broader down cycle in the networking industry could lead to continued weakness in orders, and Cisco's lower FY24 guidance has raised concerns about its future performance. Investor sentiment remains weak after consecutive quarters of lower guidance, and demand from service provider customers is unlikely to recover until FY25E according to Deutsche Bank.

How might competitive pressures affect Cisco?

Competitive pressures are expected to intensify, as companies such as Arista Networks and Extreme Networks challenge Cisco's market position. Despite strategic moves, including the acquisition of Splunk, there are concerns about Cisco's ability to capture share in key growth infrastructure markets. Market share challenges in key markets are also echoed by Citi Research, with a small but growing AI mix not considered sufficient to re-rate the stock sustainably.

Taurus case

What are the growth opportunities for Cisco?

Cisco's growth opportunities lie in its leadership in AI networking and strong performance in the observability technology sector. By entering the AI ​​networking market, Cisco can achieve revenues similar to those of Arista by year 25. The faster-than-expected end to the WLAN inventory surplus is also seen as a positive sign for the market. Morgan Stanley's bull case assumes further success with the Splunk integration, while the base case is based on a return to normal demand in FY25. The company asserts that the current stock price offers an opportunity that outweighs waiting for ideal market conditions.

Can Cisco overcome its current challenges?

Analysts believe Cisco can overcome its current challenges, citing the company's confidence in AI opportunities and its outlook for AI orders to double. The company expects modest EPS growth in FY24, and there is a possibility that the stock price could reach the mid-70s following the Splunk integration. Deutsche Bank expects a 3.6% CAGR for Cisco between FY25E-FY28E and a 7.6% CAGR for adjusted EPS over the same period. The Splunk transaction is expected to contribute to a compound annual growth rate (CAGR) of approximately 3.6% between FY25E and FY28E.

SWOT analysis

strength point:

– Strong foothold in AI networks with important projects on the horizon.

– Higher gross and operating margins due to cost management and switching to higher margin programs.

– Large market value, which indicates stability.

Weaknesses:

– Decrease in product orders due to excess inventory at the customer.

– Revised downwards guidance reflecting potential slowdown in the organisation.

– Limitations on financial flexibility due to strategic acquisitions.

Opportunities:

– A leadership position in the emerging web-based artificial intelligence networking market.

– Growth in the surveillance technology sector and the small and medium enterprises sector.

– Possibility of stock price growth after Splunk integration.

Threats:

– Intensifying competition in key growth infrastructure markets.

– An overall economic downturn will likely reduce IT spending.

– Challenges of obtaining market share despite strategic acquisitions.

Analysts' goals

– Piper Sandler: Neutral rating with a price target of $51 (March 20, 2024).

– JMP Securities: Market Performance Rating (February 15, 2024).

– Barclays: Equal Weight rating with a price target of $48 (March 19, 2024).

– KeyBanc Capital Markets Inc.: No specific rating or price target provided (March 19, 2024).

– Deutsche Bank: Suspend ratings with a target price of $52 (April 9, 2024).

– Morgan Stanley: Overweight rating with a price target of $58 (April 9, 2024).

– Citi Research: Neutral rating with a price target of $52 (April 12, 2024).

The analyzes used in this article span from October 2023 to April 2024.

InvestingPro Insights

While Cisco Systems, Inc. (NASDAQ:CSCO) maneuvering through the complexities of the networking sector, its financial stability and shareholder value propositions are under scrutiny. InvestingPro data highlights key financial metrics that determine Cisco's current market position:

• The company's market capitalization is US$190.8 billion, underscoring its importance in the industry.
• Cisco's P/E ratio as of the trailing twelve months ending Q2 2024 is 13.57, indicating a potentially attractive valuation when combined with its near-term earnings growth prospects.
• With a dividend yield of 3.4% according to the latest data, Cisco remains an attractive option for income-focused investors, especially given its track record of increasing dividends for 13 straight years, as highlighted by an InvestingPro tip.

InvestingPro's tips provide additional insights into Cisco's strategic financial health:

• The strength of a company's balance sheet is evident because it holds more cash than debt, indicating financial flexibility.
• Furthermore, Cisco stock trades with low price volatility, which may attract investors looking for stability in turbulent market conditions.

These metrics and tips are particularly important given Cisco's recent performance and future outlook as discussed in the article. The company's ability to maintain a strong balance sheet and deliver consistent earnings can be viewed as a counterbalance to the challenges it faces in the near term, such as revised guidance and competitive pressures.

For investors looking for a more comprehensive analysis, additional InvestingPro tips are available on the site InvestingPro, which delves deeper into Cisco's financial nuances and market position.