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Cisco Systems CSCO shares have declined 9.4% year to date, significantly underperforming the Zacks Computer & Technology sector’s return of 29.5%.

CSCO is suffering from sluggish networking sales, primarily due to lackluster demand from telecommunication and cable services providers, as well as stiff competition.

Excess inventory with customers has dragged down growth in the recent past. In the third quarter of fiscal 2024, Cisco reported revenues of $12.7 billion, which declined 12.8% year over year, primarily due to an 18.6% decline in product revenues, which accounted for 71% of total revenues.

Excluding Splunk (acquisition completed on Mar 18, 2024), product orders were unchanged year over year, reflecting sluggish demand.

Cisco’s 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.

YTD Performance

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Cisco’s Long-Term Prospect Rides on Innovation

The increase in AI-related workload presents a strong long-term opportunity for Cisco thanks to an innovative portfolio.

The Security segment is particularly noteworthy, with solutions like XDR, Secure Access and Multicloud Defense suites that are winning customers. In third-quarter fiscal 2024, Security revenues jumped 36%, including Splunk. Growth in SASE and double-digit growth in Zero Trust offering were noteworthy.

Acquisitions, including Splunk and Isovalent, have helped in strengthening the portfolio. The addition of Splunk enhances the recurring revenue base of CSCO. Annual Recurring Revenues surged 22% to $29.2 billion in the fiscal third quarter.

Security portfolio expansion initiatives are expected to drive growth. Cisco has unveiled new capabilities for its Security Cloud, designed to enhance its security architecture in the AI era. The Cisco Hypershield, announced in April 2024, embeds security enforcement within virtual machines, Kubernetes clusters, and advanced silicon in servers and networking devices.

Cisco introduced the Cisco Firewall 1200 Series, a high-performing, SD-WAN-enabled firewall family that promises three times the performance of comparable firewalls.

Strong Partner Base Drives Growth

Cisco’s expanding partner base, including the likes of NVIDIA NVDA, Lenovo and AT&T T, deserves attention.

Cisco’s partnership with NVIDIA is expected to boost its footprint in the AI space. The partnership combines Cisco’s expertise in Ethernet networking with NVIDIA’s GPU technology.

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. This solution integrates Cisco’s AI-native networking capabilities with NVIDIA’s accelerated computing and AI software, complemented by VAST’s robust data storage platform.

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.

Near-Term Prospects Not So Bright

Cisco’s lackluster near-term view keeps us on the sidelines. The shares are also trading below the 50-day moving average, indicating a bearish trend.

CSCO Shares Trading Below 50-Day SMA

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The company currently expects revenues between $13.4 billion and $13.6 billion in the fourth quarter of fiscal 2024 and earnings between 84 and 86 cents per share.

The Zacks Consensus Estimate for fourth-quarter fiscal 2024 revenues is currently pegged at $13.51 billion, suggesting an 11.15% year-over-year decline. The consensus mark for earnings is currently pegged at 85 cents per share, unchanged over the past 30 days, indicating a 25.44% decline year over year.

For fiscal 2024, revenues are expected between $53.6 billion and $53.8 billion. Non-GAAP earnings are anticipated between $3.69 and $3.71 per share.

The Zacks Consensus Estimate for fiscal 2024 revenues is currently pegged at $53.67 billion, suggesting a 5.84% year-over-year decline. The consensus mark for earnings is currently pegged at $3.71 per share, unchanged over the past 30 days, indicating a 4.63% decline year over year.

Cisco now expects inventory destocking to be completed by July this year. This is expected to boost demand in fiscal 2025.

CSCO expects revenue growth to be in the low to mid-single-digit range for the fiscal year. The Zacks Consensus Estimate for fiscal 2025 revenues is currently pegged at $55.31 billion, indicating 3.06% year-over-year growth.

However, the negative impact of high interest related to the Splunk acquisition is expected to be $350 million per quarter. This, along with higher operating expenses, is expected to keep margins under pressure in fiscal 2025. Cisco expects the fiscal 2025 operating margin to be in line with the fourth-quarter fiscal 2024 guidance range of 31.5%-32.5%.

The Zacks Consensus Estimate for fiscal 2025 earnings has declined by a penny over the past 30 days to $3.54 per share, suggesting a 4.53% year-over-year decline.

Estimate Revision

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Cisco is trading at a premium, with a forward 12-month P/S of 3.34X compared with the Zacks Computer Networking industry’s 3.05X, reflecting a stretched valuation.

Hence, investors should wait for a better entry point for Cisco, which currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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