To The Moon

$Cisco(CSCO)$

Finding the perfect stock is rare in investing—especially one in the best industry, with a 200% increase over the last year, and a PE ratio still at 20. Stocks like that are unusual because once they hit those levels, everyone rushes to buy them, and their price shoots up. If, for example, you could somehow make Nvidia's PE just 20 with a snap of your fingers, its stock would quickly rise to 50 or 60, as everyone would jump on it. That’s how stocks work.

When it comes to Cisco, there’s a lot to like. The industry they’re in, particularly data centers, is vital, and personally, I use Cisco products at work because nothing else competes at their level. This company has a strong economic moat—no one does what they do as well. However, Cisco hasn't been a top performer lately, and their past business decisions haven’t driven strong growth. That said, they do pay a relatively high dividend, about twice the S&P 500 level, so the stock's value isn't just about its price.

Looking at the last decade, Cisco's return has been about 100%, which isn’t terrible, but it's underperformed the S&P 500, which has risen around 220% in the same period. Even when factoring in dividends, it hasn't kept pace. But currently, the stock is cheaper, with a forward PE of 16. The S&P 500’s forward PE is around 23, meaning Cisco is underpriced compared to the market, which could present an opportunity, especially considering its underperformance.

Earning Overview

Cisco Systems (CSCO) reported $13.99 billion in revenue for the quarter ending in January 2025, marking a 9.4% year-over-year increase. Earnings per share (EPS) for the period were $0.94, up from $0.87 in the previous year.

Cisco's stock saw gains following its fiscal Q2 earnings beat. The company reported non-GAAP (adjusted) earnings per share of $0.94, surpassing analysts’ expectations of $0.91, and generated $13.99 billion in revenue, exceeding the forecast of $13.87 billion. This marked a 9.4% year-over-year revenue increase. Additionally, Cisco secured $350 million in artificial intelligence (AI) infrastructure orders. Management noted that product orders grew 29% year-over-year, or 11% when excluding the impact of the Splunk acquisition.

Fundamental Analysis

Along with the earnings report, Cisco announced a 3% increase in its quarterly dividend, raising it to $0.41 per share. The company also received board approval for an additional $15 billion in share buybacks.

For fiscal Q3, Cisco expects sales to range between $13.9 billion and $14.1 billion, with adjusted earnings per share projected between $0.90 and $0.92. For the full fiscal year, the company anticipates sales between $56 billion and $56.5 billion, with adjusted earnings per share ranging from $3.68 to $3.74.

Historically, the company has been relatively flat, with little growth. While not trying to bash it, the reality is Cisco has had its struggles. Your bet here is that the world needs more of what Cisco does, and if they can turn things around—maybe just growing at a normal rate (around 10% annually, like the S&P 500)—the stock could have substantial upside. If Cisco grows at that pace, its stock could catch up and outperform, especially if it returns to an average PE multiple, meaning there’s value to be had.

Free Cash Flow

As of the second quarter of fiscal year 2025, Cisco reported a free cash flow of $10.21 billion, marking a 46.37% decline from the previous year. This decrease is primarily attributed to increased capital expenditures and changes in working capital.

Technical Analysis

Support levels

• Recent Lows: If Cisco’s price has previously tested a specific low point and bounced back, that may act as a key support level. For example, if Cisco has tested around $50 or $55 in recent months, those could be important support zones.

• Moving Averages: Key moving averages, like the 50-day or 200-day moving averages, often act as dynamic support levels. If Cisco’s price approaches these averages, it may encounter buying pressure.

• Fibonacci Retracement Levels: Fibonacci retracement levels (such as 38.2%, 50%, and 61.8%) can also act as support levels in a downtrend.

Resistance Levels:

Resistance levels are price points where a stock typically faces selling pressure, making it difficult for the price to rise above them. For Cisco, resistance could be found at:

• Recent Highs: Resistance may be near the recent high price points, such as $60, $65, or $70. If Cisco approaches these levels, it might face selling pressure from investors looking to lock in profits.

• Trendlines: Long-term upward or downward trendlines can serve as dynamic resistance levels. If Cisco has been in a long-term upward trend, it might encounter resistance at the top end of the trendline.

• Key Technical Indicators: RSI (Relative Strength Index) levels above 70 or MACD (Moving Average Convergence Divergence) signals could indicate that Cisco is approaching overbought territory, and resistance might come into play.

Risks and Challenges

Cisco's revenue showing a flat or stagnant performance can be attributed to a number of factors, often tied to broader economic conditions, market dynamics, and internal company strategies. Here are some reasons why Cisco might experience flat revenue growth:

Mature Product Categories: Some of Cisco's core product lines, such as traditional networking hardware, might be experiencing slower growth as the market for these technologies matures. As companies shift toward newer technologies (like software-based solutions or cloud infrastructure), demand for certain legacy products could stagnate.

Economic Conditions: Broader economic uncertainty, such as recessions, inflation, or slowdowns in key global markets, can lead companies to reduce IT spending or delay technology upgrades, impacting Cisco's revenue.

Supply Chain Issues: Ongoing supply chain disruptions, particularly around semiconductor shortages, have impacted Cisco’s ability to meet demand for its products, which can lead to flat or reduced revenue growth, even if the demand is still there.

Competition: Cisco faces significant competition in its various business segments, particularly from companies in cloud computing, networking, and cybersecurity. Competitors such as Arista Networks, Juniper Networks, and cloud providers like Amazon Web Services (AWS) can put pressure on Cisco’s market share, leading to slower revenue growth.

Shift Toward Software and Services: Cisco has been transitioning its business model to focus more on software, services, and recurring revenue. While this transition is positive in the long run, it may result in a slower growth rate in the near term as the company shifts from selling hardware to building out software and subscription services.

Valuation

Using DCF Assumptions for Cisco:

Projected Free Cash Flows (FCF): We'll assume a starting point for FCF and apply a growth rate over the next 5 years. For example, assume Cisco’s FCF in the first year is $10 billion, with a 5% annual growth over the next 5 years. Discount Rate (WACC): Cisco's Weighted Average Cost of Capital (WACC) is assumed to be around 8%. This combines the cost of equity and the cost of debt, reflecting the company’s risk profile. Terminal Growth Rate: This is assumed to be 2.5%, representing long-term growth (often tied to inflation or the broader economy). Net Debt: Cisco's net debt as of their latest financials would be used to adjust the enterprise value for equity. We will assume net debt of $10 billion.Shares Outstanding: Cisco has approximately 4.1 billion shares outstanding.

Based on this simplified DCF model, the fair value of Cisco's stock for 2025 could be around $46.7 per share. However, this is a rough estimate based on several assumptions about future growth rates, discount rates, and debt levels.

Market sentiment

In corporate news, Cisco's stock price target was raised from $64 to $68 by Citi. Chuck Robbins, wearing his Business Roundtable hat, is optimistic about Cisco’s future, especially after their acquisition of Splunk. The combination of Splunk and Cisco, paired with their strong cybersecurity programs and AI-driven defense technology, positions them for success, particularly in securing federal and banking contracts. Competitors are also positive about Cisco’s technology, and the stock has been performing well.

J.P. Morgan also released an updated report, with lead analyst Samik Chatterjee maintaining an overweight rating and boosting the one-year price target from $69 to $73 per share. Chatterjee highlighted strong demand signals in Cisco's recent quarterly report and expects sales growth and potential earnings beats to offset any negative impact from tariffs.

Conclusion

In conclusion, Cisco might not be a fast-growing stock, but it could still provide solid returns in the long run, especially if it can show some growth at an average rate. If you plan to hold it long-term, even with sideways movement, the dividend makes it worth considering.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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