Is Cisco Stock a Buy Today?

We view Cisco Systems CSCO as the dominant force in enterprise networking and expect it to retain its strength in legacy as well as future networks. Cisco holds leading market share across switching, routing, and wireless access, with strong complementary positions in security and collaboration. We believe the company’s portfolio is appropriately positioned to benefit from trends toward hybrid work and hybrid cloud environments. It offers the most comprehensive suite of capabilities across converging networking and security markets, and we deem its intertwined products as sticky and worthy of a wide economic moat.

Key Morningstar Metrics for Cisco

• Fair Value Estimate: $56
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Economic Moat Rating

We assign Cisco Systems a wide economic moat rating based on customer switching costs. We think Cisco’s offerings for networking and cybersecurity are comprehensive and intertwined, with integrated software, hardware, and services creating a sticky overall solution and leading to pricing power. These competitive advantages give us confidence that Cisco can earn economic profits, more likely than not, over the next 20 years. Cisco is the dominant force in enterprise networking and the only provider we see with a complete end-to-end portfolio for both on-premises and the cloud. Cisco holds the top market share position in nearly every subsection of the enterprise networking market, including campus and data center switching, networking software, routing, software-defined wide-area networking, and wireless access.

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Fair Value Estimate for Cisco Stock

Our fair value estimate of $56 per share implies fiscal 2023 adjusted price/earnings of 15 times, fiscal 2023 enterprise value/sales of 4 times, a free cash flow yield of 7%, and a next-12-months dividend yield of 3%. The biggest drivers of our valuation are growth of Cisco’s core networking business and the ability to maintain and improve gross and operating margins. We forecast 5% compound annual growth for Cisco through fiscal 2027, including an exceptional fiscal 2023 with 10% growth and 3%-4% midcycle growth thereafter. We think its largest core networking business, including services, will grow roughly 3% at midcycle, largely in line with the underlying market.

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Risk and Uncertainty

We assign Cisco a Medium Morningstar Uncertainty Rating. The company can experience some mild cyclicality in customer IT spending and is under constant competitive threat across its broad portfolio. We’ve seen concentrated investment from more focused competitors like Arista Networks ANET, Palo Alto Networks PANW, and Fortinet FTNT lead to market share gains at Cisco’s expense. The company’s service provider customer base can offer lumpy spending habits, which could lead to some swings in sales and profits. We believe Cisco can face risk from its outsourced manufacturing model, which can result in supply constraints as it saw in fiscal 2021 and 2022.

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Cisco Bulls Say

• Cisco holds dominant market share across networking and leading share in areas like switching software and software-defined wide-area networking, which bodes well for its position in the next era.
• We view Cisco’s shift toward a higher proportion of software and subscription-based consumption models as positive.
• Cisco has a strong balance sheet and generates impressive free cash flow, most of which it sends back to shareholders.

Cisco Bears Say

• Cisco’s core networking markets don’t offer robust growth opportunities; the company has to seek top-line upside from nascent corners or other markets where it is less competitively advantaged.
• Cisco has been losing market share across networking and security over the last decade and will need to redouble its efforts against the likes of Arista or cybersecurity platform providers.
• In high-speed public cloud applications, Cisco lags Arista in market share, which could hamper its growth as these applications increase in the market mix.

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