Tech industry icon Cisco Systems (CSCO) updated long-term guidance at an investor day for CSCO stock on June 4. Its outlook included the purchase of software company Splunk (SPLK) for $28 billion in cash.

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Cisco Stock: Updated Guidance

For CSCO stock, the company forecast “revenue growth of 4% to 6% in fiscal 2026 and and fiscal 2027 (fiscal 2025 already guided low to mid single-digit growth),” said Barclays analyst Tim Long in a report.

The company’s guidance also included “networking growing 2% to 5%, security and observability (with Splunk) growing 15% to 17% and services growing 2% to 4%,” Long said. He added: “Higher EPS growth (6% to 8%) makes sense as mix should improve and management has been good at managing expenses.”

Cisco stock has retreated 6% this year after advancing 6% in 2023.

At William Blair, analyst Sebastien Naji called Cisco’s outlook “somewhat underwhelming” in a report.

CSCO Stock: AI Upside?

He added: ” Cisco’s management continued to tout the market share gains that Ethernet is making within AI networks. To date Cisco has
recorded $800 million in AI orders (across Silicon One ASICs, 8000 routers, and optics) and reiterated that is has a line of sight toward $1 billion in AI orders in fiscal 2025.”

Cisco aims to increase recurring revenue from subscription-based software and services and shift away from its core business of selling computer network switches and routers.

At Raymond James, analyst Simon Leopold said in a report: “Cisco’s financial outlook including 4% to 6% sales growth will not surprise investors. We hear debate regarding the degree of conservatism, but consider the forecast appropriate. The narrative regarding increasing recurring revenue and software remains intact as does the increasing opportunities from artificial intelligence and cloud.”

The company reported fiscal Q3 earnings and revenue that fell from a year earlier but topped consensus estimates as product orders improved from a year earlier.

With roots in data analytics software, Splunk has expanded into cybersecurity. In addition, it’s undergoing a transition to a software-as-a-service business model from on-premise products.

CSCO Stock: Rival HPE Makes Acquisition

Meanwhile, Hewlett Packard Enterprises‘ (HPE) acquisition of Juniper (JNPR) will make HPE a stronger, more direct competitor with Cisco, analysts say.

Like rival Arista Networks (ANET), CSCO stock could get a long-range boost from growing usage of artificial intelligence software. AI workloads processed in cloud data centers require increased computing resources and networking bandwidth.

With a 3% dividend yield, Cisco stock still finds support among institutional investors.

The outlook for CSCO stock depends on spending trends for cloud computing infrastructure as well as corporate and telecom networks.

Cisco Stock: Shift To Software

From a 1990 initial public offering through early 2000, Cisco thrived as a major supplier of the hardware to build internet networks, both to telecom firms and large companies outside that sector. Cisco stock soared more than 100,000% in that period, before the dot.com bubble burst.

Cisco remains dominant in the corporate campus networking market.

At the end of April, Cisco had $23.3 billion in cash and equivalents plus short-term investments on its balance sheet. That gives it ample resources for a big acquisition if the opportunity arises.

Analysts with a bullish view of CSCO stock expect the company to gain share in the cloud titan market vs. Arista Networks. It beat Cisco to market in cloud data centers by grabbing Microsoft (MSFT), Facebook (FB) and Amazon.com (AMZN) as customers.

During the coronavirus pandemic, corporate spending on data networks slowed amid increased office vacancy rates. One view is that corporate networks will be less important if remote work becomes entrenched.

As a result, Cisco stock needs to hike investments in next-generation enterprise networks. The company aims to help corporate customers build hybrid network architectures that utilize on-premise data centers and cloud-computing infrastructure.

Cisco aims to build up its Webex video conferencing platform versus Microsoft and Zoom Video Communications (ZM). It recently acquired Socio Labs to boost Webex events. Long range, Cisco is working on holographic communications.

CSCO Stock: Fundamental Analysis

The maker of computer networking gear has been able to ramp up backlog fulfillment after it struggled with supply chain issues last year.

One bright spot for CSCO stock has been sales of the Catalyst 9000 switches. Also, there’s opportunity for Cisco in data center upgrades.

The so-called “internet cloud” is made up of warehouse-sized data centers. They’re packed with racks of computer servers, data storage systems and networking gear. Most cloud computing data centers now use 100 gigabit-per-second communications gear.

Meanwhile, a data center upgrade cycle to 400G technology has been delayed.

Also, analysts say Cisco is also well-positioned as corporate buyers shift to networking technology called software-defined wide-area networking, or SD-WAN. The technology often taps bandwidth on the public internet. With SD-WAN, companies have less need for costly private data networks leased from telecom companies.

The build-out of 5G wireless networks has yet to emerge as a growth driver for CSCO stock. Cisco has partnered with Dish Network (DISH) to sell 5G business services to large companies.

Cisco’s Growth Through Acquisitions

Much of Cisco’s revenue growth has come from acquisitions.

Cisco in late 2019 agreed to buy U.K.-based IMImobile, which sells cloud communications software, in a deal valued at $730 million.

In May 2020, Cisco acquired ThousandEyes, a networking intelligence company, for about $1 billion.

In 2017, Cisco acquired software maker AppDynamics for $3.7 billion. It bought BroadSoft for $1.9 billion in late 2017.

In July 2019, Cisco acquired Duo Security for $2.35 billion, marking its biggest cybersecurity acquisition since its purchase of Sourcefire in 2013. Acquiring Duo Security bolstered Cisco in an emerging category called zero trust cybersecurity.

Cisco in 2019 agreed to buy Acacia Communications for $2.6 billion in cash. China’s government delayed approval of the deal. In January 2021, Cisco upped its offer for Acacia to $4.5 billion and the deal finally closed.

Cisco Stock Fundamentals

Cisco fiscal Q3 earnings fell 12% from a year earlier to 88 cents on an adjusted basis. Revenue fell 13% to $12.7 billion. Splunk added $413 million in fiscal Q3 revenue.

Analysts estimated that Cisco would earn 83 cents on revenue of $12.53 billion, according to FactSet.

Fiscal Q3 product orders rose 4% versus a 12% decline in the previous quarter.

For the July quarter of fiscal 2024, Cisco forecasts earnings of 85 cents at the midpoint of guidance vs. analysts consensus estimate of 86 cents.

Cisco said it expects sales of $13.5 billion at the midpoint of its outlook. Analysts predicted that sales will fall 13% to $13.25 billion.

For Splunk, management forecast July revenue in a range of $950 million to $1 billion, below estimates of  $1.065 billion in sales.

Meanwhile, for fiscal 2025, “management set early expectations for revenue growth in the low to mid single digits, while indicating that non-GAAP operating income margin for the full year should be around the same 32% level it guided to for the fourth quarter,” said William Blair analyst Sebastien Naji in a report.

Cisco Stock: Is It A Buy Now?

In the long run, Cisco stock analysts expect the company’s margins to improve as more revenue comes from software products.

CSCO stock currently holds a Relative Strength Rating of 26 out of a best-possible 99. The best stocks tend to have an RS rating of 80 or better.

Meanwhile, Cisco stock also owns an IBD Composite Rating of 50 out of a best-possible 99, according to IBD Stock Checkup. The best growth stocks have a Composite Rating of 90 or better.

Shares have an Accumulation/Distribution Rating of C-plus, according to IBD MarketSmith analysis. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading.

As of June 4, Cisco stock holds an entry point of 50.58. It trades well below the entry point.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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