An Earnings Disappointment Sets Up a Discount for Cisco Stock Investors

Typically, every publicly traded company’s goal is to beat its earnings target by as wide a margin as possible. Failure to impress investors could spark painful losses in equity valuation. And that was the case recently with Cisco Systems (NASDAQ:CSCO), when, following a lackluster report for its fiscal second quarter of 2020, Cisco stock quickly plummeted. But in this case, Wall Street may be missing the forest for the trees.

An Earnings Backlash Tempts the Contrarian Case for Cisco Stock
Source: Ken Wolter /

On the surface, the numbers don’t appear to justify the volatility in Cisco stock. Prior to the Q2 disclosure, analysts forecast earnings per share to come in at 76 cents. Instead, the telecommunications network equipment specialist delivered EPS of a penny higher. Furthermore, this latest per-share profitability haul bested the company’s results of 72 cents for fiscal Q2 2019.

For revenue, covering analysts anticipated $11.98 billion. Here again, CSCO squeaked ahead of forecast, ringing up $12.01 billion. But the problem was that the latest tally represented roughly a 4% decline from the year-ago quarter. And as a CNBC report put it, investors were not impressed with the technology firm’s continuing top-line sales declines.

It wasn’t just the optics against historical trends that worried onlookers. Per CNBC, “Revenue for Cisco’s two largest business segments, Infrastructure Platforms and Applications, were both down 8% year over year, coming in at $6.5 billion and $1.3 billion, respectively.” Further, management expects YoY sales declines between 1.5% to 3.5% in Q3. Hence, the loss of credibility hurt Cisco stock.

One notable positive was that management anticipates hitting EPS of 79 cents to 81 cents in Q3, which is above estimates. Still, this did not factor in the impact of coronavirus from China.

Cisco Stock Requires Patience

Based on the bullet points above, Cisco stock doesn’t immediately offer much confidence. Nevertheless, I believe the bearishness is overdone. The reality is that CSCO is operating in a very turbulent time. Once some of the headwinds fade, the upside narrative will look significantly better.

Indeed, Cisco CEO Chuck Robbins noted as such over the last few months. Last November, Robbins reported pensiveness among the company’s large customers due to global economic uncertainties surrounding Brexit and the U.S.-China trade war. And in January at Davos, Robbins warned about “sluggish” conditions outside the U.S.

However, it’s the same challenges affecting other players in the space. What’s happening right now is that these headwinds are converging simultaneously with attractive business opportunities. But the longer-term narrative for Cisco stock is this: the obstacles are temporary, but the opportunities are not.

For instance, the 5G rollout is a crucial spark for CSCO because it specializes in backhaul and core services for mobile carriers. According to Cisco general manager Jonathan Davidson, the existing backhaul network in the U.S. is operating at a “really low capacity.”

Just as importantly, the recently announced approval of the merger of T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) offers a viable third mobile carrier to compete against established giants Verizon Communications (NYSE:VZ) and AT&T (NYSE:T). This presents upside potential for Cisco stock, provided you have some patience.

Also, cybersecurity could easily become a greater portion of CSCO’s revenue stream. Rumors sparked — which Cisco denied — that they’re interested in acquiring FireEye (NASDAQ:FEYE). For me, it’s not so much FireEye specifically but the intention that’s important.

By some expert forecasts, the cybersecurity market could be worth nearly $250 billion by 2023. Having a robust cybersecurity business will also allow Cisco to offer valuable synergies to enterprise clients.

Enticing Technical Picture

Ultimately, though, Cisco stock appeals because it currently offers a solid deal to investors. Despite the rumblings about negative revenue growth trends, CSCO has very stable financials. It’s consistently hitting its profitability targets. Plus, free cash flow trends remain strong and positive.

On the technical side, shares are trading hands at levels first breached in early 2018. For an organization that is theoretically getting more relevant, that’s a long time to stay flat.

Realistically speaking, then, what’s preventing investors from jumping aboard are the many global economic challenges. Eventually, the probability is that they’ll fade. Even with such challenges, societies never stop innovating. Therefore, the price of Cisco stock today represents a discount against future bullishness.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long AT&T.

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