Will Splunk and network recovery impact Cisco’s Q4 results?

Cisco Systems Inc. (NASDAQ: CSCO) The stock has fared poorly this year, down about 2% since early January. By comparison, Palo Alto Networks stock has gained about 13% during the same period. Now, Cisco is set to report its fourth-quarter fiscal 2024 results soon. We expect revenue to come in at $13.56 billion, down about 6% from a year ago, while earnings are likely to come in at $0.86 per share, slightly above consensus estimates but down from $1.08 a year ago. So what are the trends that are likely to impact Cisco’s results this quarter?

Cisco’s product sales have slowed as customers have focused on installing and deploying their purchased products over the past few quarters. Additionally, large companies, including cloud providers and telecommunications companies, have held back on network-related capital expenditures due to economic uncertainty. Separately, Cisco is also facing competition from smaller networking companies, which is also weighing on growth. In the third quarter of fiscal 2024, Cisco’s revenue fell nearly 13% year over year to $12.7 billion, and adjusted earnings were $0.88 per share. Still, Cisco indicated that demand appears to be stabilizing as customers use up their existing inventory, and we could start to see some improvement in the fourth quarter.

In March, the company entered into an agreement to acquire Splunk, a software player that provides tools for analyzing log files and other data using artificial intelligence to help companies mitigate the risk of cybersecurity incidents. Q4 FY24 will be the first full quarter after the deal closes, and we’ll look for updates on the integration. Cisco intends to cross-sell Splunk products to drive revenue synergies, indicating that it has identified about 5,000 current Cisco customers who could also become Splunk customers.

Cisco has seen progress on gross margin in recent quarters, driven by lower freight and component costs, a favorable product mix, and overall better cost management. In the third quarter of fiscal 2024, gross margins increased to 65%, up 170 basis points from the same period a year earlier. We saw similar trends in the fourth quarter. The company has been increasingly pushing towards a recurring revenue model through its software subscriptions and service contracts, which could also help margins. In the latest quarter, total annual recurring revenue was $29.2 billion, including $4.2 billion from the Splunk acquisition.

CSCO stock has gained about 8% from January 2021 to date, compared with about 46% for the S&P 500 over that roughly three-year period. Overall, CSCO stock has underperformed relative to the index. The stock returned 46% in 2021, -22% in 2022 and 9% in 2023. By comparison, Arista Networks, another networking company, has seen its stock rise about 300% over the same period. Arista is a market leader in high-speed networks that support hyperscalers and large enterprises, which are key stakeholders in the generative AI trend. It turns out that Arista is part of Trefis High Quality’s 30-stock portfolio, which has outperformed the S&P 500 every year in the same period of time. Why? As a group, HQ Portfolio stocks have delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride, as seen in HQ Portfolio’s performance metrics. Will Cisco stock do better in the future?

We believe CSCO stock is somewhat undervalued at current levels. The stock is trading at about 13 times consensus fiscal 2024 earnings. We think this is a reasonable valuation, although growth this year is likely to be muted. Cisco’s emphasis on a recurring revenue model and increasing focus on cybersecurity through acquisitions could help the stock. We also believe the company will outperform its large tech peers in a potential economic downturn, given its lower valuation and secular spending trends on digital and networks. We value CSCO stock at about $55 per share, which is about 20% above the current market price. See our analysis Cisco quote to take a closer look at what’s driving our stock valuation. Also check out our analysis Cisco revenues for more details about the company’s main revenue sources.

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