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Stock Analyst Update

Cisco Executes Well in Q2; Maintaining $48 FVE

We are maintaining our fair value estimate of $48 per share for Cisco Systems and view shares as fairly valued.


Narrow-moat Cisco Systems' (CSCO) 4% year-over-year revenue decline in the second quarter was expected as macro spending uncertainties weigh on product orders. Customers prolonging their purchase decisions are expected to impact third-quarter revenue as well, but we believe that Cisco is prudently managing costs and is positioned to rebound top line growth as customers invest in their technology demands. In our view, software and product disaggregation alongside flexible consumption models showcase Cisco's willingness to stay in line with, and prosper from, the rapid changes in the networking landscape. With the ramp of nascent technologies for Wi-Fi 6, 400Gb switching, 5G networks, hybrid-cloud networking, alongside cybersecurity and application demand, we believe that Cisco has healthy upcoming growth drivers. We are maintaining our fair value estimate of $48 per share and view shares as fairly valued.

Compared with the prior year, infrastructure platforms and applications were both down 8%, while security grew by 9% and services expanded by 5%. In looking at the infrastructure business, the Catalyst 9k continues to grow by double-digits, but overall switching revenue declined in the campus and data center markets, and service provider weakness pulled down routing revenue. Meraki wireless had strong growth alongside the rollout of Wi-Fi 6 products; however, overall wireless revenue was down. Data center declined as server sales headwinds persist as more businesses look toward using cloud-based offerings. While such large year-over-year declines in Cisco's largest business segment can be alarming, the year prior was an incredible spending environment, and we expect technology upgrades for connectivity requirements to propel infrastructure platforms back to growth. Though product orders were down 6% year over year, we also believe the growth in subscription-based software and services can help insulate Cisco in challenging spending environments.

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