Where Will Cisco Stock Be in 1 Year?

Cisco's (CSCO -0.50%) stock plunged 11% during after-hours trading on Nov. 15 after the networking giant posted its latest earnings report. For the first quarter of fiscal 2024, which ended on Oct. 28, its revenue rose 8% year over year to $14.67 billion and exceeded analysts' estimates by $40 million. Its adjusted earnings grew 29% to $1.11 per share and cleared the consensus forecast by $0.08 per share.

Those headline numbers looked healthy, but a sequential drop in its networking revenue and a reduction in its full-year revenue guidance spooked the bulls. Can Cisco overcome those challenges over the next 12 months?

Image source: Getty Images.

The key numbers

Starting in fiscal 2024, Cisco reduced its number of product segments from five (secure and agile networks, internet for the future, end-to-end security, collaboration, and optimized application experiences) to four (networking, security, observability, and collaboration). It simplified that structure ahead of its planned acquisition of Splunk (SPLK), which it expects to close in the third quarter of calendar 2024.

During Q1, Cisco generated 60% of its revenue from its networking business. That segment had grappled with supply chain constraints throughout fiscal 2022, but it largely overcame those issues in fiscal 2023. Its revenue rose 10% year over year during the first quarter, but it actually declined 7% sequentially on a reclassified basis (which combines its secure and agile networks and internet for the future divisions).

That slowdown is troubling because it's the networking segment's first sequential drop since the third quarter of fiscal 2022, when it was still struggling to overcome its supply chain issues. During the conference call, CEO Chuck Robbins blamed that decline on slower orders as its "larger enterprise, service provider, and cloud customers" took more time to deploy their purchased hardware. Robbins said while this phase was "temporary," he estimated there were still "one quarter to two quarters' worth of shipped orders in customers' hands" waiting to be deployed.

Cisco generated a combined 15% of its revenue from its smaller collaboration and security segments, which both posted low-single-digit year-over-year growth rates as macro headwinds drove companies to rein in their spending. It generated just 1% of its revenue from its observability segment, but that division grew 21% year over year as its ThousandEyes data observability platform continued to expand. That segment should expand significantly after it closes its acquisition of Splunk, which also provides software to easily search, monitor, and analyze large amounts of data.

On the bright side, Cisco's adjusted gross margin hit a 17-year high as it lapped its supply chain constraints and generated more revenue from its higher-margin products. Its operating margin also hit a record high as it reined in its spending.

Data source: Cisco.

Was the guidance that bad?

Unfortunately, Cisco's weaknesses still offset its strengths, and its revenue and adjusted EPS growth decelerated significantly from the previous quarter.

Data source: Cisco. YOY = year over year.

It expects its revenue to drop 6%-7% year over year in the second quarter and slip 4%-6% for the full year. That's well below its prior full-year forecast for 0%-2% growth. Cisco sees its adjusted EPS slumping 5%-7% year over year in Q2, and it projects its adjusted EPS will come in between a 1% decline and 1% growth for the full year. That's also well below its prior full-year adjusted EPS outlook for a 3%-5% uptick.

That grim outlook casts doubt on Cisco's ability to fulfill its goal of growing its revenue and adjusted EPS at a compound annual growth rate (CAGR) of 5%-7% from fiscal 2021 to fiscal 2025. From fiscal 2021 to fiscal 2023, Cisco's revenue rose at a CAGR of 7% as its adjusted EPS climbed at a CAGR of 22%, but its slowdown in fiscal 2024 could cause it to miss its fiscal 2025 targets. However, Cisco's planned takeover of Splunk might still help it achieve those goals on an inorganic basis.

Where will Cisco's stock be in a year?

At $47 a share, Cisco trades at just 12 times the midpoint of its adjusted EPS guidance for fiscal 2024. It also pays a high forward dividend yield of 3.3%. That low valuation and high yield might limit its downside potential, but it will likely underperform the market over the next 12 months as its core networking business cools off. So until Cisco actually proves that its slower orders are merely "temporary" and will only last one to two quarters, its stock will remain out of favor in this volatile market.