Cisco Stock: Thesis Intact Despite Poor Execution (NASDAQ:CSCO)



Analysis of Previous Forecast

Since my final article and the start of the yr, Cisco (NASDAQ:CSCO) has underperformed each the S&P 500 and the Nasdaq 100.

Total Return

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Total return is near my forecast Minimum state of affairs of -34%. Three key inputs have been used to derive the whole return forecast: income progress, gross margin, and a number of growth.

Fiscal 2022 income progress of three% was between the Minimum (0th percentile) and Worst Case (tenth percentile) eventualities for a similar motive specified for the Minimum: “Supply constraints or COVID cause 0% growth.” Supply was constrained resulting from Covid lockdowns in China.

Total Revenue

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Fiscal 2022 gross margin of 62.5% was barely worse than the forecast Worst Case (tenth percentile) state of affairs of 63%.

Gross Profit Margin

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Price-to-earnings contracted to ~14 and was close to the forecast Minimum state of affairs of -30% contraction.

Price To Earnings Ratio

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As a outcome, enterprise worth is now approaching 5-year lows:

Enterprise Value

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Latest Results

According to the 2022 This fall Earnings Presentation, Cisco’s backlog is at a file excessive regardless that This fall order progress declined 6% year-over-year. As was true final yr, each Current and Non-Current Unearned Revenue have continued to pattern upwards.

Unearned Revenue

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According to the 2022 This fall Earnings name, internet scale orders grew 50% on a trailing 4 quarter foundation and the 8000 collection routers, based mostly on the Silicon One structure, is the quickest rising platform in firm historical past.

Based on the present market capitalization, Cisco’s 2022 earnings yield was 7%. Cash returned to equity holders by way of dividends and share repurchases yielded 8.6%. In addition, the corporate paid down long-term debt by $2 billion, and it’s now lower than $10 billion or ~5% of enterprise worth. Even if the corporate have been to overlook its steerage once more and carry out at related ranges to final yr, the money returned to shareholders nonetheless must be important.

Key Inputs

The three inputs to the valuation are: income progress, gross margin, and a number of growth. These parameters are estimated for 5 completely different eventualities: Minimum (0th percentile), Worst Case (tenth percentile), Most Likely, Best Case (ninetieth percentile), and Maximum (one hundredth percentile). Historical information, present information, administration estimates, and greatest guesses underlie the next assumptions:

Revenue Growth: Base case matches backside of 4-6% FY 2022 steerage

  • Minimum: Supply constraints or a recession trigger -5% progress, or 9% under base
  • Worst Case: Supply constraints or a recession trigger 0%, or 4% under base
  • Most Likely: Matches base case of 4%
  • Best Case: Matches excessive facet of steerage of 6%, or 2% above base
  • Maximum: Matches excessive facet of steerage and shrinks backlog yielding 7% progress, or 3% above base

Gross Margin: Base case matches present gross margin of 62.5%

  • Minimum: Supply constraints or a recession trigger margin to fall 3%
  • Worst Case: Matches 2021 decline of 1.5%
  • Most Likely: Matches base case
  • Base Case: Matches 2021 margin of 64%, or 1.5% improve
  • Maximum: Matches highest margin of 64.5%, or 2% improve 2022

Price-to-Earnings: Base case matches present worth of 14

  • Minimum: 10, or 29% contraction
  • Worst Case: 12, or 14% contraction
  • Most Likely: 14 or steady
  • Best Case: 18, or 28% growth
  • Maximum: 24, or 71% growth

The base case annual complete return is assumed to be the dividend yield, or 4%. For the opposite eventualities, the assumptions are mixed to calculate the next estimates of complete return.

Total Return Estimates


To create the forecast, the above eventualities are enter into software program that creates the graph under and related statistics. The black values beneath the graph point out the whole return values as proven within the earlier desk of eventualities. The white share values overlaid on the graph correspond to the proportion of the whole space below the curve inside every coloured area. This is the forecast chance of the whole return falling throughout the related vary. For instance, the sunshine inexperienced area represents a 40% probability that complete return is between 4% and 33% over the subsequent yr.

Total Return Forecast


Based on the above forecast, the software program performs a Monte Carlo analysis to calculate anticipated return and danger. The ensuing statistics are proven under.

Forecast Statistics


At an anticipated return of 6%, comparatively low danger, and asymmetrically constructive risk-return profile (constructive skewness), Cisco is a purchase. The firm is conservatively financed and efficiency has been traditionally hampered by company-specific execution points. If these are resolved this yr, Cisco is prone to outperform the market by a large margin.

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