Cisco’s Q3 Indicates Recovery; FVE Up to $50

We are raising our fair value estimate for narrow-moat Cisco CSCO to $50 per share from $48 and view the shares as fairly valued. Drivers of our increase include Cisco benefiting from organizations modernizing their networks for digital transformations and hybrid work environments, the ramp of Wi-Fi 6 and campus switching upgrades, security and networking converging, and the early adoption of 400 Gb data center switching, 5G solutions, and edge networking. We believe Cisco is well positioned to capitalize on the broad-based strong demand it is seeing across various industries and geographies as economies reopen.

Year-over-year revenue growth of 7% for the fiscal third quarter topped our expectations. Cisco is experiencing a strong spending environment due to pandemic-related restrictions being alleviated, as total product orders increased by 10% year over year. However, supply chain-related issues with procuring materials limited overall growth, and Cisco expects these issues to persist for the remainder of 2021. We believe Cisco has taken prudent actions to ensure it can meet customer delivery requirements, and we expect any moderate gross margin compression to be ephemeral. With a strong bounceback in orders and backlog, we believe Cisco is taking the right approach in investing in potential high-growth avenues for the coming quarters to take advantage of spending recovering.

Revenue with infrastructure platforms grew by 6%, applications expanded by 5%, security grew by 13%, and services increased by 8%, all year over year. Switching strength was seen in the data center, with 400 Gb ramps starting, and campus products being upgraded alongside the strong results from wireless. Routing performed well as service provider demand is ramping with 5G upgrades. Webex led the applications business, followed by growth in unified communications and AppDynamics. Security had broad-based growth, with highlights including cloud security led by Duo, Umbrella, and SecureX.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.