He noted that Cisco shares are down 27% year to date. Investors are concerned about Cisco's market position and worry that its market share will be lost by Arista Networks (ANET.US) andJuniper Networks(JNPR.US) rival preemption, with both companies raising their growth guidance for 2022 while Cisco did not.
Investors are also worried that Cisco may abandon its previous guidance of revenue and profit growth of about 6% annually by fiscal year 2025. The company is likely to make large acquisitions to "accelerate the shift of revenue to more independent recurring sources" and even cut its gross margin expectations as peers are doing so.
Despite the stock's cheap price, investor sentiment was low ahead of the latest quarterly report, Badri said.
"Overall, we believe lower top-line growth expectations are prudent amid slightly higher gross margins," Badri said.The revenue slowdown is due to supply chain issues, as well as lower revenues from the Russian and Ukrainian businesses.
Badri also said it was "increasingly likely" that Cisco would announce a "significant" acquisition, given that its software business relies heavily on its hardware shipments. The deal is likely to dilute the company's equity.
Despite the multiple negatives facing Cisco, its share price is cheap, its free cash flow yield is 7%, and its gross and operating margins are largely unchanged. Cisco has also addressed supply chain issues and the loss of market share in the large network equipment segment, so Badri believes Cisco is "attractive."
As of press time, Cisco fell 0.28% to $46.64 before the market.