Cisco Systems, a prominent player in the networking hardware industry, received a significant boost in its stock value on Monday, courtesy of Morgan Stanley analyst Meta Marshall. Marshall resumed coverage of Cisco with an Overweight rating and set a $58 price target, highlighting that the stock is currently trading at a near-record discount compared to the S&P 500 index.
Despite its recent struggles, Cisco remains a dominant force in the market, providing essential networking solutions. However, the company has faced challenges in the past year, with its stock declining by 3% since the beginning of the year and 4% over the last 12 months, significantly underperforming the broader tech sector. This decline can be attributed partially to disappointing earnings performances, stemming from issues related to excess customer inventory exacerbated by disruptions in the technology supply chain caused by the Covid-19 pandemic.
During the pandemic, Cisco experienced fluctuations in revenue due to semiconductor shortages. As component availability improved, there was a surge in revenues as the company worked through backlogged orders. However, customers ended up receiving more hardware than they could readily absorb, leading to a softening of orders and revenues. Additionally, Cisco’s recently completed $28 billion acquisition of the observability software company Splunk has also influenced its stock performance.
According to Marshall’s research note, a catalyst for positive earnings revisions for Cisco may still be one or two quarters away. This delay is attributed in part to the need for adjustments to consensus estimates following the Splunk deal. The costs associated with financing the acquisition, including new debt issuance totaling over $13 billion, need to be factored into estimates. Cisco’s CFO Scott Herren indicated that the annual interest expense related to the Splunk deal is expected to be around 5% of the transaction price, amounting to approximately $1.4 billion.
Despite these near-term challenges, Marshall’s optimistic outlook and the anticipation of positive earnings revisions suggest that Cisco has the potential for future growth. Investors will be closely monitoring the company’s performance and adjustments to consensus estimates in the coming quarters.