After Cisco's Q1 Report, Analysts Talk Easier Comps, Discounted Valuation, Spending Rebound

Cisco Systems, Inc. CSCO shares are trading solidly higher after the networking giant reported strongly quarterly results and issued an upbeat forecast for the running quarter.

The Cisco Analysts: Morgan Stanley analyst Meta Marshall maintained an Overweight rating and $54 price target.

Needham analyst Alex Henderson maintained a Hold rating.

Raymond James analyst Simon Leopold maintained an Outperform rating and $49 price target.

Cisco Analyst Says Networking Footprint Overlooked: Cisco reported first-quarter revenue roughly in line with estimates — a better-than-feared result, given the lingering weak enterprise spend environment, Morgan Stanley analyst Marshall said in a note.

"Ability to perform with relative stability through a significantly weakened macro environment, preserve earnings power and maintain cash flow flexibility highlights our OW investment thesis on CSCO," the analyst said. 

Cisco has the flexibility to grow earnings relatively in line with the S&P 500, she said.

The company delivered first-quarter results with a markedly improved tone as opposed to the uncertainty expressed in the fourth-quarter report, Marshall said.

With business activity improving and earnings surprising to the upside due to more resilient margins than expected, investors are likely to heave a sigh of relief, the analyst said.

Full recovery in the enterprise and commercial environment is a few quarters out, but positive offsets due to diversification came to fruition in the first quarter, she said.

Cisco's uniquely large networking footprint spans across product categories, including higher-priority security and collaboration software products and across customer verticals including more resilient public sector and service provider cohorts, according to Morgan Stanley. 

"We think this is too far overlooked, with CSCO trading near a historical high discount relative to the S&P500."

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Cisco Comps Get Easier, Needham Says: Cisco reported a 9% year-over-year decline in revenue, dragged by a steep 13.1% drop in product revenue that came on top of a decline in the year-ago period, Needham analyst Henderson said in a note. 

Orders declined 5% year-over-year, with only the public sector bucking the downtrend with a 5% increase, the analyst said.

The company said order linearity in the quarter was relatively stable, suggesting there wasn't a pick up in orders later in the quarter, he said. 

"Given the Y/Y declines in Orders in each of the last 5 quarters, the comps are bound to get easier." 

EPS held up reasonably well in the quarter as well as in the guidance, Henderson said, adding that the 7% reduction in force Cisco implemented should help margins.

RayJay Says Cisco Can Return To Year-Over-Year Growth: The 1% year-over-year drop suggested by the second-quarter revenue guidance came as a surprise, as expectations were for a decline between 3.4% and 10%, Raymond James analyst Leopold said in a note. 

"Considering negative sentiment, management's constructive tone, and improved fundamentals, we expect short-term appreciation above the after-hours ~7%," the analyst said. 

RayJay is of the view that Cisco can return to year-over-year growth with the easy comparisons beginning in April.

Rosenblatt Says Security, Video Are Bright Spots:  Strong first-quarter linearity enabled management to convey a much more confident tone than in the last quarter, Rosenblatt analyst Koontz said in a note. 

Among product areas, security was strong, driven by work-from-home upgrades, and the Webex collaboration also remained solid within the applications group, the analyst said.

Cisco, which still holds a very strong share in enterprise, is doubling down on its effort to fend off continued share loss to Zoom Video Communications Inc ZM, he said.

Webex reportedly now totals 600 million users in October, double from March, Henderson said.

In comparison, Zoom Video boasts of 300 million daily users, including free ones, the analyst said.

Infrastructure products, accounting for 53% of revenue, saw a 16% year-over-year decline even as key rivals such as Arista Networks Inc ANET and Juniper Networks, Inc. JNPR continued to gain share, with both posting mid-single digit enterprise infrastructure declines, he said.

"CSCO strengths in select product segments such as security and video collaboration bode well, including areas it has strong but declining share."

Further Upside Exists For Cisco, Tigress Says: Cisco is seeing improving demand, as corporations and governments are resuming spending on networking equipment as the economy slowly recovers, Tigress Financials analyst Iven Feinseth said.

Cisco's industry-leading position and strong brand equit enable it to benefit from key secular IT trends, including cloud migration, AI development, the high-speed 5G network rollout, WiFi 6 and the increasing connectivity needs of the IoT, the analyst said.

Additionally, new product offerings, including AppD, Catalyst 9000 and HyperFlex, will continue to drive accelerating growth, he said.

"I believe further upside exists from current levels and continue to recommend purchase."

Cisco also has a dividend yield of 3.72%, Feinseth said.

CSCO Price Action: At last check, Cisco shares were soaring 6.69% to $41.26.

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