Is There a Silver Lining to Cisco's Sell-Off?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Cisco Systems (NASDAQ: CSCO  ) released a first-quarter report that shocked the market and investors alike. Before all was said and done, the stock suffered a double-digit percentage loss, despite the fact that the first quarter itself wasn't all that bad.

Clearly serving as the sole culprit was the company's current quarter sales outlook. Cisco admitted many of its key customer segments are withdrawing orders, and investors may now be understandably questioning management competence. With all eyes now on how Cisco performs in the second quarter, investors may be looking at a solid buying opportunity.

On the surface, a solid quarter
At first glance, Cisco's underlying results looked strong and indicate that this is a company off to a good start to fiscal 2014. Metrics across the board showed positive momentum: sales and non-GAAP earnings per share grew 2% and 10%, respectively, versus the same quarter last year, and gross margin improved by 30 basis points year over year.

Cisco's results were substantially better than many of the quarters turned in by its technology giant peers. For example, fellow Dow Jones Industrial Average component Intel (NASDAQ: INTC  ) generated flat results in the comparable quarter. Revenue and earnings per share were flat as it continues to struggle getting its brand of chips in mobile devices in any meaningful way. As personal computer shipments stagnate around the globe and industry growth clearly in mobile going forward, Intel has struggled mightily to adapt. The company's earnings per share have dropped 17% through the first nine months of the year.

Horrible outlook is the clear culprit
Naturally, this serves as another reminder that the stock market is a forward-looking mechanism. This quarter's strong results were priced in for some time, and the market is now turning to the future to decide whether Cisco's valuation was warranted. And, judging by the magnitude of the sell-off on an otherwise up day for the market, the answer appears to be a resounding "no."

Cisco expects current-quarter revenue to drop 4% versus the same quarter last year. Declines are expected in all of the company's major geographies. Among customer segments, only Enterprise and Commercial customers are expected to produce revenue increases. Cisco's forward guidance is what really spooked the market, since expectations were for Cisco to actually grow revenue this quarter.

If you're looking for a large-cap tech stock with a more positive recent past and future outlook, software giant Microsoft (NASDAQ: MSFT  ) may be a good alternative. Microsoft increased revenue by 16% and earnings per share by 17% in its own first quarter.

Moreover, there are more reasons to be optimistic about Microsoft than Cisco in the near future. Microsoft's current quarter results will benefit from the release of the new generation of its Xbox console. I've written critically of placing too much enthusiasm on the Xbox One, set for release in time for the holiday shopping season, since Microsoft's Xbox business constitutes a relatively small percentage of overall revenue. However, there will be definite integration possibilities with Microsoft's slew of other social and consumer-related services and devices.

The Foolish takeaway
Cisco's first-quarter results were strong, but its current quarter outlook was an unmitigated disaster. The company announced an additional $15 billion in share buybacks on top of the $16 billion left in its existing share repurchase authorization, but that's little consolation for a revenue outlook that badly missed expectations.

Of course, there's always the potential for Cisco to beat its revised expectations, and thanks to the massive market sell-off, the bar has been lowered. This is made easier by the fact that Cisco wasn't expensive to begin with, and now looks fairly cheap at just 11 times fiscal 2013 EPS. Add in its 3.2% dividend, and you can definitely make the case that Cisco represents a classic value play. Of course, Intel and Microsoft are no dividend slouches either, as they each yield 3.7% and 3%, respectively.

In short, it may prove useful to remember that one quarter doesn't make or break a company. Cisco will struggle this quarter, but if it can manage to outperform its severely reduced expectations, it's likely the massive sell-off will serve as a good buying opportunity.

Got iPad?
The new iPad Mini Retina might be hard to come by this quarter, given all the reports of supply constraints. Well, we're going to be sure to get a few -- and give them away! That's right: For the first time ever, The Motley Fool is hosting a contest where you can win a free iPad Mini Retina. All you have to do is tell us why you love The Motley Fool by clicking here! We'll pick the three most Foolish submissions to receive a free iPad Mini with Retina display.

See full terms and conditions by clicking here

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2727259, ~/Articles/ArticleHandler.aspx, 9/26/2016 1:22:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:00 PM
CSCO $31.34 Down -0.32 -1.01%
Cisco Systems CAPS Rating: ****
INTC $37.19 Down -0.36 -0.96%
Intel CAPS Rating: ****
MSFT $57.43 Down -0.39 -0.67%
Microsoft CAPS Rating: ****