Cisco Systems (NASDAQ: CSCO) Q4 results and guidance prove that its AI play was smart. Once a networking giant and now a networking and AI-powered data management platform, the company outperformed its guidance and analysts estimates, raised guidance, and the guidance is likely cautious. The takeaway is that weakness in the legacy business is offset by strength in new, with a return to top-line growth expected in FQ2 2025, which is next quarter. The guidance is likely cautious because of the underlying metrics driven by Splunk.
Nothing But Good News In Cisco Systems’ Q4 Results
Cisco Systems’ Q4 revenue contracted by 10.3%, but the report does not contain bad news. The analysts expected a larger contraction due to softness in the networking industry, and the guidance is favorable. The Product segment is down 15% but offset by a 6% increase in Services, with results in both segments aided by Splunk. Splunk added 700 basis points to the top line, leading to a double-digit increase in product orders and subscriptions. Subscriptions, including Splunk, grew to 51% of the annual revenue, driving a 21% increase in annual recurring revenue.
The margin news is mixed. The primary hurdles are costs related to the Splunk acquisition. Those will evaporate quickly, leaving the company in a solid financial position, able to continue investing in growth and returning capital to shareholders. The critical details are that the gross margin widened but is offset by increased SG&A and expenses, resulting in a double-digit decline in earnings and cash flow. However, the adjusted $0.87, down 30% YoY, is above consensus, and cash flow was sufficient to sustain balance sheet health.
The guidance is why Cisco stock will likely continue to rise in 2024 and 2025. The company’s guidance aligns with the consensus at the top line but is above consensus at the midpoint. The guidance aligns with the outlook for persisting sequential growth and YoY growth to return in FQ2, calendar Q4 2024.
Analysts' Sentiment Firms: Cisco Systems to Trade in the Mid-$50s
The analysts’ response to Cisco’s news is mixed with numerous price target revisions in both directions. The takeaway from the activity is that the price target for this Hold-rated stock is centered around the consensus figure, which implies a 15% upside. The consensus reported by MarketBeat is up compared to last month at $56.85 and comes with a relatively high conviction with 21 analysts in the mix. The low target is $49, still above the current action, suggesting a deep-value opportunity.
Cisco Systems is a value, trading at 13x this year’s earnings estimate and 12x next year’s, considering its position in the tech world, blossoming transition, cash flow, and capital return. Capital returns in Q4 include buybacks and dividends worth $3.6 billion. The dividend is worth about 3.5% in yield, among the highest from blue chip tech stocks, and the repurchases are equally robust. Share buybacks in Q4 and F2024 resulted in a 1.2% average decline for the quarter, and ample funding is left under the current authorization. The company will likely repurchase another 1% or more share this year while increasing the distribution.
Cisco Systems Confirms Support
The price action in CSCO is bullish, with the market up more than 7%, showing support at critical levels. Support is near the low end of a multi-year trading range; today’s action suggests a reversal is in play at that level. The reversal is also seen in the stochastic and MACD indicators, which have already formed bullish crossovers and show a strong buy signal. The market should continue upward from here, easily breaking resistance near $50 on its way up to the upper-$50 region. Assuming a break of $50, the next critical target for resistance is near $52.50.
