Skip to Content
Stock Analyst Update

Cisco's Cost Management Balances Out Revenue Headwinds

We are maintaining our fair value estimate and view shares as undervalued.


Narrow-moat Cisco Systems' (CSCO) third-quarter revenue was slightly ahead of CapIQ consensus estimates, while controlled spending led to earnings still coming within management's previous guidance. Revenue in the month of March was ahead of management's expectations due to customers requiring solutions to service increased network demand, work from home communications, and security. However, the proliferation of countries becoming locked down in April greatly weighed on sales within the quarter and top line headwinds are expected to continue through the fourth quarter. We believe that Cisco's strong balance sheet, resilient cash flow generation, and its shift to a more recurring revenue model help insulate the company from lasting impacts of the current pandemic. Cisco remains committed to returning at least 50% of its free cash flow to shareholders. We believe recent macro pressures have provided investors an attractive entry point for Cisco, and we are maintaining our $48 fair value estimate.

Compared with the prior year, revenue declined 8%. By segment, infrastructure platforms was down 15% and Applications declined by 5%, while security grew by 7% and services expanded by 5%. Supply chain-related issues in manufacturing and procuring components hampered infrastructure platforms: switching was down in the data center and campus markets, routing contracted in the service provider and enterprise markets, and wireless was down although the Wi-Fi 6 ramp and Meraki showed strength. Management commented that Cisco's pursuit of web scale networking is gaining traction, with the second quarter of sequential robust growth with those crucial customers. Applications continues to be pulled down by legacy unified communication offerings, but Cisco saw growth in conferencing and another quarter of double-digit growth for application monitoring via AppDynamics. Security strength was led by unified threat management, cloud security, and identity and access management demand.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Mark Cash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.