While most mega-cap technology stocks have posted impressive rallies this year, the performance of Cisco Systems (CSCO) is an exception. With technology stocks such as Alphabet (GOOGL) and Apple (AAPL) soaring more than +30% this year, Cisco Systems is down -1.5%. While growth in other mega-cap tech stocks is expected to accelerate, Cisco’s growth is expected to slow.
The underperformance of Cisco Systems has continued over the past five years, with its stock price more than 40% below the record Y2K high seen in 2000. Ironhold Capital Management said, “Cisco is in that in-between space, not growing fast enough to be attractive as a growth name, and it isn’t so cheap to like it as a value stock.”
A negative factor for Cisco Systems is the outlook for the company’s future revenue growth to slow. When Cisco reports Q3 quarterly earnings after today’s close, the consensus is that the company’s revenue will increase +9.7% this fiscal year, which would be the fastest pace since 2010. However, future revenue growth is expected to slow to +4.4% in fiscal 2024 and continue decelerating for at least two years after that. In contrast, Bloomberg Intelligence projects growth rates for the tech sector overall to bottom this year before accelerating going forward.
Cisco’s valuation reflects the expectations of stagnant growth. The stock trades at 12 times forward earnings, a discount to its 10-year average, as well as a discount to the Nasdaq 100 Stock Index ($IU) (QQQ). However, Cisco also offers one of the highest free cash-flow yields among components of the Nasdaq 100 and one of the highest indicated dividend yields among stocks in the technology sector.
On the positive side for Cisco Systems, the company has beaten earnings expectations every quarter for more than ten years, according to Bloomberg data. Also, JPMorgan Chase said the stock’s valuation is likely to limit downside risk, although they recognize “more bearish outcomes” are possible with the results. Summit Global Investments favors holding Cisco Systems as a defensive holding, saying the company has “rock-solid financials, it is a cash-flow machine, it pays a solid dividend, and it is much cheaper than the high-growth tech stocks.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
