Contemplate Purchasing, Offloading, or Maintaining Cisco Shares?
Cisco Systems, the networking giant, has had a strong start to its 2024 fiscal year, with its stock rising 6% compared to the S&P 500's 3% growth. In contrast, rival Alphabet saw a 3% decline. Cisco's Q2 earnings, announced in February, surpassed expectations, with a 9% y-o-y revenue increase to $14 billion. Although net income dipped 8%, earnings per share (EPS) saw an 8% boost on a non-GAAP basis.
Cisco's revenue outlook for the full year was subsequently increased, with a revised target of $56 billion to $56.5 billion. EPS forecast also grew, to between $3.68 and $3.74. The company's shift towards services, such as security, is evident in its quarterly performance. While networking revenue took a 14% hit, security revenue doubled y-o-y. Service revenue also grew by 6%.
Cisco's acquisition of Splunk in March 2024 bolstered its security offerings and boosted revenue. This move, aimed at strengthening AI-powered threat detection and response capabilities, has contributed positively to Cisco's earnings. Splunk's AI-driven software will be cross-sold to 5,000 potential Cisco customers.
Gross margins have also improved in recent quarters, benefiting from cost efficiencies and a favorable product mix. The company has also been moving towards a recurring revenue model, which could further support margins.
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Our revised Cisco valuation stands at $65 per share, based on an expected EPS of $3.70 and a P/E multiple of 17.6x for fiscal 2025. Despite this, the valuation is roughly in line with the current market price.
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[1] Source: Trefis[2] Source: Trefis and Empirical Asset Management[3] Source: Trefis[4] Source: Trefis[5] Source: Trefis
- Despite the 8% decrease in Cisco's net income, their earnings per share (EPS) still saw an 8% boost in Q2 2024, on a non-GAAP basis.
- Hubspot, a potential competitor, has not yet announced its Q2 2025 financial results, so it's unclear if their revenue will surpass Cisco's Q2 2024 revenue increase of 9%.
- Cisco's stock price continued to rise in 2025, with many analysts attributing this to the company's efficient use of acquired resources, like Splunk, to boost earnings.
- By 2025, it's predicted that Cisco's acquisition of Splunk will have contributed to an increase in their security revenue, with the potential to cross-sell Splunk's AI-driven software to 5,000 of their existing customers.
