Cisco Systems, Inc. (CSCO) in San Jose, Calif., is a well-known technology company that designs, manufactures, and sells internet protocol-based networking and other products related to the communications and information technology industry. The company’s total revenue increased 8.1% year-over-year to $12.90 billion for its fiscal first quarter, ended October 30, 2021. However, its revenue missed the consensus estimate marginally. While its net income increased 37.1% year-over-year to $2.98 billion, its EPS came in at $0.70, up 37.3% year-over-year.

CSCO’s shares have declined 3.8% since the results were reported on November 17, to close yesterday’s trading session at $55.30. This is primarily because due to the company's tepid guidance provided by the company. CSCO expects $0.64 - $0.68 per share in profit, or $0.80 - $0.82 on an adjusted basis, for its fiscal second quarter.

Nevertheless, hedge funds have grown more bullish on the stock. Also, consistent improvements in the Internet of Things (IoT) and 5G are expected to boost CSCO’s growth prospects.

Here is what could shape CSCO’s performance in the near term:

Positive Developments

On November 16, DISH Network Corporation (DISH) and CSCO collaborated to sell cloud-powered 5G services to businesses. DISH is expected to use CSCO's equipment to build its network and jointly invest in building a structure to deliver private 5G services to businesses.

Also, CSCO announced significant innovations across its Webex ecosystem at its WebexOne 2021, held last month. The company unveiled a preview of its next-generation hybrid work collaboration product, Webex Hologram, at WebexOne. In addition, CSCO announced its partnership with COP26, to provide connectivity across the whole venue.

Favorable Analysts Estimates

Analysts expect CSCO’s revenue to increase 5.8% in its fiscal year 2022 and 5.3% in fiscal 2023. The company’s EPS is expected to grow 6.2% in the current year and 7.9% next year. Also, its EPS is expected to grow at a 6.6% rate per annum over the next five years. Wall Street analysts expect the stock to hit $64 in the near term, which indicates a 15.7% potential upside.

Reasonable Valuation

In terms of forward non-GAAP P/E, CSCO’s 16.15x is 34.4% lower than the 24.61x industry average. And the stock’s 4.10x EV/S is 3.9% lower than the 4.27x industry average. Furthermore, its forward EV/EBITDA and EV/EBIT of 11.06x and 12.19x, respectively, are lower than the 16.35x and 20.47x industry averages.

POWR Ratings Reflect Rosy Prospects

CSCO has an overall A rating, which equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. Among these categories, CSCO has a B grade for Stability, consistent with its  0.90 beta.

The stock has an A grade for Quality, which is in sync with its trailing-12-month gross profit and levered FCF margins of 63.73% and 22.19%, respectively, which are higher than the 49.76% and 11.96% industry averages.

CSCO is ranked #2 out of 55 stocks in the Technology - Communication/Networking industry. Click here to see the additional POWR Ratings for CSCO (Growth, Value, Momentum, and Sentiment).

Bottom Line

CSCO’s shares have dipped in price since November 17 when the company provided lower guidance amid worldwide supply chain constraints. However, the stock seems to be trading at a discount to its peers, given its growth prospects. So, we think it could be wise to bet on the stock now.

How Does Cisco (CSCO) Stack Up Against its Peers?

While CSCO has an overall POWR Rating of A, one could also check out its two other A-rated industry peers: Extreme Networks, Inc. (EXTR) and Photronics, Inc. (PLAB).

CSCO shares fell $0.09 (-0.16%) in premarket trading Wednesday. Year-to-date, CSCO has gained 27.20%, versus a 26.45% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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