– Wall Street forecasts EPS of $0.837 on revenue of $13.3 billion
– Rapidly growing subscription services
– The stock underperformed the S&P 500 in 2022, -29% vs -17%
The tech-heavy U.S. Nasdaq Composite climbed 1,000 points last week, or about 10%, as investors embraced growth stocks for the first time in ages. This new optimism could be reinforced when Cisco Systems (CSCO: NASDAQ) reports fiscal first-quarter results after Wall Street closes tonight (November 16), with real hope that the numbers could beat forecasts.
Cisco Systems is an IP-based networking company that provides products and services to Internet service providers, enterprises, government organizations, and consumers. Its kit is actually the nuts and bolts that make the internet work and so it’s closely followed as an indicator of business spending on technology infrastructure.
Stocks have had a tough 2022, like most players in the tech space, down nearly 30% year-to-date and underperforming the 17% drop in the S&P 500.
WHY CISCO COULD SURPASS
Although shunned by investors, Cisco is a relatively defensive technology company that should be able to weather further economic shocks and reduce IT investments, if not better than most.
This is partly because much of the equipment Cisco sells needs to be upgraded as the world increasingly embraces new technology trends, such as cloud computing, hybrid working, network security and ultra-fast 5G mobile technology, where spending is holding up well.
That’s what Cisco’s regular order pipeline shows, with business-critical networking and security technologies, unlike PC refreshes, for example.
During the August earnings call, Cisco Chief Executive Chuck Robbins revealed revenue performance obligations (effectively contracts signed but not necessarily fulfilled) of more than $31 billion. “Combined with low cancellation rates, which remain below pre-pandemic levels, this sets the stage for increased visibility and strong revenue growth as we head into fiscal 2023,” said Robins.
This may suggest that the $184 billion company has real leeway to beat already low expectations, with the company itself guiding revenue growth of around 4-6%. This will be facilitated by the supply chain issues which have gradually subsided.
The Wall Street analyst consensus is $0.837 in earnings per share on $13.3 billion in revenue in the three months to September 30, 2022.
FAST GROWING SUBSCRIPTIONS
Another positive factor to consider is that Robbins has shifted Cisco’s focus to delivering its networking services remotely over the Internet. The idea is to look for more revenue streams beyond networking equipment which is Cisco’s main source of money.
Items such as Internet security and optimization tools are increasingly sold on a subscription basis, and software sales have become a significant part of total revenue. This figure was around 30% in 2021 and reached 43% of revenue in the fiscal quarter that ended July 31, 2022. The company aims for subscriptions to generate 50% of annual revenue in its fiscal year. 2025.
Cisco stock is expected to open at $45.10 later today.
Date of issue: November 16, 2022
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