NEW YORK – While big tech stocks have fueled the market’s advance in 2023, Cisco Systems Inc. has been a notable exception.
As the likes of Alphabet Inc., Microsoft Corp., and Apple Inc. have lit up the Nasdaq 100 Index with gains exceeding 30 per cent, the biggest maker of computer networking equipment is slightly negative for the year.
The underperformance is nothing new for Cisco, whose shares have stagnated for five years and remain more than 40 per cent below a record hit in 2000. While the firm ticks some of the defensive boxes that have served as a boost to big tech this year, its growth is expected to slow in coming years at a time when investors are seeking acceleration.
“Cisco is in that in-between space, not growing fast enough to be attractive as a growth name, and it isn’t so cheap that I really like it as a value stock,” said Siddharth Singhai, chief investment officer at Ironhold Capital Management, whose firm doesn’t own the shares but has been looking into it.
The problem is not so much current growth rates, but what analysts expect to be a future slowdown. Ahead of third-quarter results due after Wednesday’s close, estimates point to a 9.7 per cent increase in revenue this fiscal year, which would be the fastest pace since 2010.
Looking further out, the pace is expected to slow to 4.4 per cent in fiscal 2024 and continue decelerating for at least the two years after that.
In contrast, growth rates at rival Microsoft Corp. are expected to bottom in fiscal 2023 before accelerating going forward, a trend that holds for the tech sector overall, according to Bloomberg Intelligence.
Cisco’s drab outlook is reflected in its valuation. The stock trades at roughly 12 times forward earnings, a discount to its 10-year average, as well as the Nasdaq 100. It also offers one of the highest free-cash-flow yields among index components, as well as one of the highest indicated dividend yields among stocks in the tech sector.
According to JPMorgan Chase & Co. analysts, the valuation is likely to limit downside risk, although they recognise “more bearish outcomes” are possible with the results. Cisco has beaten earnings expectations every quarter for more than a decade, according to data compiled by Bloomberg.
Aash Shah, senior portfolio manager with Summit Global Investments, is among those who favor the stock as a defensive holding.
“It doesn’t have a sexy growth story, but it 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,” he said.
Singhai at Ironhold Capital Management agrees that Cisco is “a lot more attractive than the high-flying names that haven’t delivered on profits or which have no cash flow.”
“The returns you get from it should be fairly stable,” he said. “However, we’re not too excited about how big those returns could be.” BLOOMBERG
