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Vivek Kumar
CSCO

Cisco reported better-than-expected revenue and profit in the first quarter of fiscal 2021 as demand for its network services, teleconferencing tools and cybersecurity software surged amid COVID-19 pandemic, sending its shares up over 8% in after-hours trading on Thursday.

The network equipment provider said its revenue plunged 9% to $11.93 billion in the first quarter of fiscal 2021, which ended on Oct. 24, beating the market expectations of $11.85 billion.

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Cisco reported net income on a generally accepted accounting principles (GAAP) basis of $2.2 billion or $0.51 per share, and non-GAAP net income of $3.2 billion or $0.76 per share. That was higher than Wall Street’s consensus of 70 cents per share.

“Although Cisco is benefiting in certain areas, like an increased need for remote collaboration and cloud security, its core products have been hampered by soft networking infrastructure upgrade demand amid widespread sheltering-in-place,” said Mark Cash, equity analyst at Morningstar.

“Nonetheless, we believe that Cisco is turning the corner after a few quarters of declining sales due to the pandemic and we expect to see improved performance in the second quarter. With Cisco more positive about the demand environment ahead, shares increased over 7% after reporting. We are maintaining our $48 fair value estimate and believe shares are undervalued,” Cash added.

Cisco forecasts GAAP EPS to be between $0.55 to $0.60 in the second quarter of fiscal 2021.

Post this announcement, Cisco shares climbed over 8% to $41.63 in extended trading on Thursday. However, the stock is down about 20% so far this year.

Executives’ comments

“Cisco is off to a solid start in fiscal 2021 and we are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other macro uncertainties,” said Chuck Robbins, chairman and CEO of Cisco.

“Our focus is on winning with a differentiated innovative portfolio, long-term growth and being a trusted technology partner offering choice and flexibility to our customers.  We see many great opportunities ahead as every company in every industry is accelerating its digital-first strategy,” Robbins added.

“Our Q1 results reflect good execution with strong margins in a challenging environment,” said CFO of Cisco, Kelly Kramer, who will be succeeded by Scott Herren from December 18.

“We continued to transform our business through more software offerings and subscriptions, driving 10% year over year growth in remaining performance obligations. We delivered strong growth in operating cash flow and returned $2.3 billion to shareholders,” Kramer added.

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Cisco Stock Price Forecast

Twenty equity analysts forecast the average price in 12 months at $47.33 with a high forecast of $55.00 and a low forecast of $36.00. The average price target represents a 22.39% increase from the last price of $38.67. From those 20 analysts, eleven rated “Buy”, nine rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $54 with a high of $65 under a bull-case scenario and $33 under the worst-case scenario. The firm currently has an “Overweight” rating on the multinational technology conglomerate’s stock. Cisco Systems had its price target raised by research analysts at Credit Suisse Group to $45 from $36. The brokerage currently has a “neutral” rating on the network equipment provider’s stock.

Several other analysts have also recently commented on the stock. Bank of America cut their price objective on shares of Cisco Systems to $50 from $52 and set a “buy” rating. ValuEngine downgraded shares to a “sell” rating from a “hold”. Royal Bank of Canada reiterated a “buy” rating and set a $48 price target. Goldman Sachs Group reiterated a “neutral” rating and issued a $45 price target.

Analyst Comments

“Infrastructure revenue likely to decline with a more limited IT budget environment, but pockets of growth can help stabilize earnings. The higher proportion of recurring sales limits downside volatility relative to previous cycles, but still not immune,” said Meta Marshall, equity analyst at Morgan Stanley.

“Security/analytics capabilities should help Cisco stay important to IT budgets even as cloud transition accelerates. Security and applications growth (primarily inorganic) help improve margins of the overall business.”

Upside and Downside Risks

Risks to Upside: 1) Software and services business drive growth. 2) Accelerated replacement cycles from product refreshes support growth in spite of weaker macro conditions. 3) A re-acceleration in GDP and therefore IT spending – highlighted by Morgan Stanley.

Risks to Downside: 1) Federal spending disruption. 2) Prolonged macro downturn and subsequent lack of recovery in networking spend. 3) Security sales materially decelerate given the disruption in leadership.

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