- Wednesday, October 16, 2024
Despite the significant drop in Cisco Systems' stock price, investors on Wall Street remain unconvinced about its standing as an artificial intelligence (AI) market leader. The company recently provided lackluster guidance for the next two quarters and announced plans to downsize its workforce by cutting over 4,000 jobs.
Although Cisco's CEO, Charles Robbins, mentioned that the company's AI orders have tripled to approximately $3 billion since the previous quarter, there are doubts about when these benefits will materialize. The fast-paced AI industry does not allow for much patience, and it may take until 2025 for Cisco to experience the full impact of this technology trend.
As a consequence of these developments, Cisco's stock price dropped more than 5% on Thursday, causing its valuation gap compared to peer company Arista Networks to widen even further. Despite these challenges, analysts have taken a cautious approach towards the stock. Approximately 71% of analysts have assigned "Hold" ratings to Cisco's shares, indicating that they require more evidence of future growth.
"While the stock appears cheap and continues to become cheaper, it is crucial to acknowledge that Arista is currently experiencing growth while Cisco is not," noted Ben Reitzes, an analyst at Melius Research. He further added, "Although there is a possibility that Cisco may benefit from an 'AI halo effect' in 2025, it will remain a 'show-me story' for at least a few more quarters."
While Cisco Systems continues to face skepticism from investors, there remains a glimmer of hope that the company's strategic initiatives, particularly within AI, will ultimately pave the way for its resurgence in the market. However, until more concrete evidence of growth surfaces, Cisco will need to work diligently to prove its potential to both Wall Street and investors.
Arista vs Cisco: A Closer Look at AI Plays
According to experts, Arista Networks may be a slightly pricier option than Cisco, but it offers a more focused and promising approach to AI. With a product cycle expected later this year and into 2025, Arista seems to have a solid roadmap ahead. On the other hand, Cisco currently trades at a lower valuation, with a price-to-earnings ratio that is below its three-year average. However, experts argue that this valuation is justified, considering the relative lack of visibility in Cisco's future prospects.
When it comes to earnings estimates, analysts have adjusted their numbers for 2025, but they believe these estimates may be on the conservative side. Analysts are especially optimistic about potential catalysts such as AI and the recent Splunk acquisition, which could add significant value to Cisco in the coming years.
Looking at the numbers, as of Wednesday's close, Cisco's forward price-to-earnings ratio stands at 12.8 times, which is below its five-year average of 14.1. This suggests that there may be room for growth and an opportunity for investors to take advantage of a potential undervaluation.
In terms of performance, Cisco expects its revenue for the April quarter to range from $12.1 billion to $12.3 billion. This represents a 16% decrease compared to the same period last year, falling short of Wall Street's consensus estimate of $13.1 billion. Similarly, the company's adjusted profits for the quarter are expected to be in the range of 84 to 86 cents per share, which is lower than analysts' consensus estimate of 92 cents.
While Arista and Cisco present different investment opportunities, both companies are poised to play a crucial role in the evolving AI landscape. Investors should carefully consider the potential long-term growth and valuation dynamics before making any investment decisions.
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