In mid-Fenruary ’25, Cisco (CSCO) traded up to $65 and peaked in mid-February right with the SP 500, traded down $10 to the $55 area during the Liberation Day selloff and then rallied back to the low $70’s before this latest earnings report.
Cisco again looks to be correcting after dropping 4.5% on Friday, August 15th, and 7.75% last week, which will give investors another chance to buy the stock in a lower-risk area, or add more to the name.
Guidance was in-line with what was expected as EPS was guided to $4.00 to $4.06 (actual consensus this weekend is $4.04), while revenue guidance for Q1 ’26 was $14.45 to $14.65 billion with the actual revenue consensus estimate this weekend of $14.76 bl, or an estimate that is above the guided range already.
Valuation:
The big change in Cisco’s expected EPS growth is that for fiscal ’26 – fiscal ’28, the networking giant is expecting 7% – 8% EPS growth the next three years, after it had averaged a very erratic 4% EPS growth the last 5 years. And the same holds true for expected revenue growth for ’26 – ’28, now expected to average 5% per year, while the 5-year historical average revenue growth rate is just 2% per year.
After last week’s drop, Cisco is now trading at 16x and 15x expected EPS for fiscal ’26 and fiscal ’27 with expected y-o-y EPS growth of 7% and 8%, respectively.
With the drop to $66 per share, Cisco has a free-cash-flow (FCF) yield of 5% again, and what’s very much unlike the Mag-7, or Mag-10, and the AI crowd, Cisco’s y-o-y capex growth is actually declining, and outside of the periods where it makes it’s big, dilutive acquisitions, like Splunk, capex is actually less than 10% of Cisco’s cash-flow from operations (CFFO).
Here was this blog’s earnings preview on Cisco from last week.
Summary / Conclusion: As a portfolio manager, it was never an issue when a stock like Cisco underperformed the SP 500 or Nasdaq benchmarks in trending markets, but when Cisco pulled a homer in the Spring of ’22 and lowered guidance when the both the SP 500 and the Barclay’s Aggregate were off to a very rough start to the year (i.e. Fed was raising the fed funds rate), then it’s very easy to get angry with management. In secular bull markets, particularly as they age, you want underperforming stocks, (think “correlation” i.e. risk, return, correlation), and you want some uncorrelated stocks to the secular bull.
Cisco fits that description today; the stock is a 6% – 8% EPS grower, and 5% revenue grower in a technology market hyper-focused on AI and the AI build-out, and it should creep along do what it does best: make dilutive acquisitions, cover those acquisitions with a lot of share repurchases, continue to generate decent cash-flow and free-cash-flow, and simply put be the yang to the SP 500’s yin.
I hope AI doesn’t become a big part of Cisco’s revenue here: Morningstar (i think) expects AI to be just 10% of total Cisco revenue by 2030. I do think Splunk might be the bigger deal given that Cisco had a stable but non-performing security business, and now Splunk, with it’s supposed cyber-security features, can bring some revenue growth to Cisco that might be a better fit with the business. Splunk is now fully integrated into Cisco’s financials, so product orders won’t exclude Splunk going forward.
The legacy networking business is still 52% of Cisco’s revenues and the segment grew 12% y-o-y in the July quarter, but networking is probably expected to slow a little going forward. The Security business is now 13% of Cisco’s toatl revnue, up from 7% per-the Splunk acquisition, and grew 9% y-o-y in this lates quarter.
For this blog, Cisco is an easy story and an easy long, as the financial media stays captivated over everything-AI. More will be added if the stock drops further over the next few days and weeks.
A trade up to the $80 area on Cisco will bring investors (including this one) full-circle from the March, 2000, high of $82 per share. It seems like a lifetime ago.
None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Readers and investors should gauge their own personal comfort with volatility, and adjust accordingly. None of this information may be updated and if updated may not be done so in a timely fashion.
Thanks for reading.