Is Cisco Stock a Buy for AI Upside?

Valued at $202.4 billion, Cisco Systems Inc. (CSCO) is a mega-cap technology company that is involved in the design, manufacture, and marketing of Internet protocol-based networking and other related products. They have a very diverse customer base, with clients in industries ranging from oil and gas, to government, sports, media, financial services, healthcare, transportation, and more. Some of its notable private sector customers include Nasdaq (NDAQ), AT&T (T), Honeywell (HON), and Marriott (MAR).

CSCO operates globally through direct sales channels, service providers, distributors, and resellers. Started in 1984, the tech giant's headquarters is located in San Jose, California.

With the artificial intelligence (AI) revolution leaving many tech names from the “old guard” behind, CSCO hasn't been the strongest performer. The stock is down 9% over the past year, and is slightly negative on a YTD basis - lagging the broader market's gains over both time frames.

However, CSCO spiked 6.8% on Aug. 15 - its biggest daily gain in years - after its AI-fueled fiscal fourth-quarter earnings impressed Wall Street.

Cisco Beats on Q4 Earnings

Cisco reported its fiscal Q4 results earlier this month, with revenue down 10.3% year over year to $13.64 billion, which topped analysts' forecasts by a comfortable $100 million margin. Additional revenue from Splunk, its most recent and biggest acquisition, arrived at $960 million for the period. Adjusted earnings for the quarter were $0.87 per share, edging past Wall Street’s $0.85 per share forecast.

Total subscription revenue rose 17% to $7.7 billion, and now represents 56% of Cisco's total revenue. Without Splunk, total subscription revenue was up 2%, representing 53% of Cisco's total revenue. Total software revenue increased 15% to $5.3 billion, with software subscription revenue up 25%. Overall, 92% of total software revenue was subscription-based.

Q4 product orders were up 14% year over year, or 6% excluding Splunk. Notably, Q4 gross margin of 67.5% marked a 20-year high for the company.

CSCO's Dividend History

Cisco ended Q4 with total cash, cash equivalents, and investments of $17.9 billion, with operating cash flow arriving at $3.7 billion.

During the quarter, Cisco returned $3.6 billion to shareholders, including $1.6 billion in quarterly dividends and $2 billion in share repurchases. That brings the total for the first half of 2024 to $12.1 billion returned to shareholders, which accounts for 119% of free cash flow. 

With a dividend yield of 3.18%, CSCO has been raising dividends for well over a decade now.

Can Cisco Capitalize on AI?

During the Q4 conference call, Chairman and CEO Charles Robbins discussed Cisco's progress on AI so far - and the opportunity that still lies ahead.

"We have now crossed $1 billion in AI orders with web scale customers to date, with three of the top four hyperscalers deploying our ethernet AI fabric, leveraging Cisco-validated designs for AI infrastructure," noted Robbins. “We expect an additional $1 billion of AI product orders in fiscal year '25… In addition, we have multiple design wins, with roughly two-third of these in AI.”

The executive added, “We believe we are well-positioned to be the key beneficiary of AI application proliferation in the enterprise,” citing Cisco's cluster solution with Nvidia (NVDA). 

“We are also enhancing our own productivity by using AI in our services and customer experience organization,” said Robbins, as the company also trims jobs in the name of efficiency.

What Does Wall Street Say?

After the Q4 results, most analysts stood pat on their Cisco ratings and price targets. 

Piper Sandler analyst James Fish reiterated a “Neutral” rating with a price target of $52, implying minimal upside potential. “Management was clearly trying to message that the demand environment is returning to normal,” wrote the firm, but cautioned that “debate will remain around if this is sustainable.”

Well Fargo (WFC) analyst Aaron Rakers backed Cisco at “Equal Weight” with a price target of $57, noting that enterprise AI adoption should be a longer-term positive for the company.

Likewise, Citi analysts reiterated a “Neutral” rating with a price target of $52, with the brokerage describing "normalizing inventory levels and order trends" as “bright spots” within the quarter.

Overall, the stock has a “Moderate Buy” rating from 24 analysts in coverage. Six analysts call CSCO a “Strong Buy,” 2 rate the stock a “Moderate Buy,” and 16 consider it a “Hold.”

The mean price target for CSCO is $55.35, implying expected upside of 9.7%. However, with a price/earnings-to-growth (PEG) ratio north of 3.00, the shares seem richly valued at current levels, relative to the expected earnings growth.