Will Expand AI Offerings With Hypershield, AI POD, And NVIDIA Partnership

Key Takeaways

• Strong AI infrastructure growth and strategic investments with major partners position Cisco for significant future revenue and earnings potential.
  
• Emphasis on subscription revenue and innovative AI-centric offerings aims to enhance steady revenue streams and net margins.
  
• Integration with Splunk, competitive pressures, tariffs, economic conditions, and leadership changes pose potential challenges to Cisco's revenue growth and market strategy.

Catalysts

Designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China.

• Cisco's strong growth in AI infrastructure orders, which are expected to exceed $1 billion in fiscal year 2025, suggests significant future revenue opportunities as they capitalize on the increasing demand for AI technology deployment across various sectors.
  
• The company's emphasis on subscription revenue, accounting for 56% of total revenue, combined with double-digit growth in annualized recurring revenue and remaining performance obligations, positions Cisco to boost steady and predictable revenue streams moving forward.
  
• Enhanced product innovation, including new AI-centric offerings like Hypershield, AI POD, and advanced security solutions such as AI Defense, positions Cisco well to increase net margins by integrating high-value, advanced solutions into their product lines.
  
• Cisco’s strategic investments in AI-related networking products and infrastructure, along with partnerships with major tech players like NVIDIA, indicate potential earnings growth as enterprises and webscale customers increasingly deploy AI-driven solutions.
  
• Cisco's commitment to returning value to shareholders, exemplified by a $15 billion share repurchase authorization and consistent dividend increases, indicates confidence in future earnings growth, which can enhance their EPS performance over time.

Cisco Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cisco Systems's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.0% today to 20.3% in 3 years time.
• Analysts expect earnings to reach $12.8 billion (and earnings per share of $3.34) by about April 2028, up from $9.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $14.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.2x on those 2028 earnings, up from 23.8x today. This future PE is greater than the current PE for the US Communications industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 1.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Cisco Systems Future Earnings Per Share Growth

Risks

• The integration of Splunk into Cisco, while showing positive signs, involves complex synergies that might face challenges that could affect Cisco's revenue growth from security and observability products.
  
• The proposed U.S. tariffs on imports from China, Mexico, and Canada could increase Cisco's cost structure, potentially impacting its profit margins negatively.
  
• The competitive pressures from white-box and ODM (Original Design Manufacturer) vendors, who are winning major deals, could lead to Cisco losing market share and pressure its revenues and margins.
  
• The general economic environment, including geopolitical uncertainties and possible changes in U.S. government spending, could influence demand for Cisco's products, impacting its revenue and earnings.
  
• The departure of key leadership, such as the President of Go-to-Market, might disrupt Cisco’s market strategies and affect its ability to capture new growth opportunities in revenue and earnings.

Valuation

• The analysts have a consensus price target of $68.28 for Cisco Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $54.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $63.0 billion, earnings will come to $12.8 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of $55.04, the analyst price target of $68.28 is 19.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.