Cisco: The Valuation Case Is Strong; AI And Splunk Help

Core Viewpoint - The cautious sentiment surrounding AI stocks is growing, with Bank of America Global Research noting a decline in forward earnings growth estimates for AI stocks, contrasting with the generally rising EPS trends of the S&P 500 [3][4][5]. Company Analysis - Cisco has experienced mixed sell-side EPS revisions, with expectations for FY 2024 and 2025 per-share operating profits to dip, yet it is still viewed as a buy due to potential growth opportunities in AI [3][4]. - Cisco's shares have underperformed this year, leading to a P/E ratio that is currently at a 10% discount to its long-term average, making it a potentially attractive investment with a forward dividend yield of 3.4% [4][9]. - In Q3, Cisco reported a non-GAAP EPS of $0.88, exceeding estimates, with revenue of $12.7 billion, down 13% year-over-year, but still beating expectations by $70 million [6][9]. - The management forecasts Q4 revenue between $13.4 billion and $13.6 billion, slightly below consensus estimates, with non-GAAP EPS expected in the range of $0.84 to $0.86 [7][9]. - Cisco's total annualized recurring revenue reached $29.2 billion, bolstered by the acquisition of Splunk, and the company is expected to benefit from share gains in Ethernet-based AI buildouts [6][7]. Earnings Outlook - Analysts predict a 5% decline in EPS for the year just ended, with a similar contraction anticipated for the following year, but expect profit growth to resume by 2026 [9][10]. - Cisco's top line is expected to decline to $53.7 billion before experiencing a modest growth rate of 3% to 5% in FY 2025 and 2026 [9][10]. Valuation Metrics - Cisco's current valuation metrics indicate it is trading at a P/E of 11.8x for 2023, which is below its historical averages, suggesting it may be undervalued [10][11]. - The stock is also attractive from a free cash flow perspective, with a normalized free cash flow yield in the high single digits [11][12]. Technical Analysis - Despite attractive valuation, Cisco's technical chart shows bearish patterns, with key support around the $45 mark and potential resistance at the 50-day moving average [17][18]. - The stock has been underperforming compared to the S&P 500, but the RSI momentum gauge indicates that bearish sentiment is not firmly established [17][18]. Conclusion - Overall, Cisco presents a compelling risk/reward scenario with opportunities in AI and a low valuation, despite some technical challenges [19].