Cisco Systems Inc (NASDAQ: CSCO) stock has been underperforming this year, falling by about 9% since early January. The company’s product sales have seen a slowdown as customers have been focused on implementing the products purchased over the last few quarters. Additionally, large companies, including cloud service providers and telecommunication players, have been holding back on networking spending amid economic uncertainty. Cisco is also facing competition from smaller networking companies, impacting its growth. In Q3 FY’24, Cisco saw its revenue decline by almost 13% year-over-year to $12.7 billion, with adjusted earnings coming in at $0.88 per share.
CSCO stock has shown little change, moving slightly from levels of $45 in early January 2021 to around $45 now, compared to an increase of about 45% for the S&P 500 over the same period. The performance of CSCO stock with respect to the index has been lackluster, with returns of 42% in 2021, -25% in 2022, and 6% in 2023. In comparison, Arista Networks, another networking company, has seen its stock surge by over 300% over the same period. Arista is a market leader in high-speed networks and forms part of the 30-stock Trefis High-Quality Portfolio, which has outperformed the S&P 500 each year over the same period.
Cisco indicates that demand could be stabilizing, with better-than-expected Q4 guidance. The company projects sales for the year ending July to be between $53.6 billion and $53.8 billion, up from a previous forecast of $51.5 billion to $52.5 billion. Cisco has been making progress with gross margins, with margins rising to 65% in Q3 FY’24, up 170 basis points compared to the year-ago period. Cisco’s push into cybersecurity, including the acquisition of Splunk, a software player, could help the company drive growth. Cisco has also been moving towards a recurring revenue model with software subscriptions and services contracts, with total annualized recurring revenue standing at $29.2 billion in the last quarter.
Despite its recent challenges, we believe CSCO stock is somewhat undervalued at current levels. Trading at just about 13x consensus earnings for FY’24, the stock has potential for growth with its push into the recurring revenue model and focus on cybersecurity through acquisitions. The company’s lower valuation and the secular spending trends on digitization and networking could help it perform better than its big tech peers in the event of an economic downturn. We value CSCO stock at about $55 per share, which is about 20% ahead of the current market price. Investors may want to consider CSCO as a potential investment opportunity with growth potential in the coming years.
