Cisco: Why Investors Have To Be Patient

Cisco Systems
Cisco Systems

Good, but not good enough. Cisco shares are on the decline after market after the company reported a nice top and bottomline beat. Trouble is, shares have jumped 14% over the past quarter, 38% over the past year, and with a run like that, it appears the Street was looking for something a whole lot better.

The company reports 40 cents in non-GAAP earnings per share; 35 cents in GAAP EPS. But both figures included a one-time, $163 million tax benefit that worked out to about 3 cents a share. That'd bring Cisco's EPS number down to 37 cents; still a penny-per-share beat, exactly what RBC's Mark Sue was anticipating, but not the blockbuster quarter he says the company needed to justify Cisco's recent run.

And that's a little unfortunate. Mostly because the analysts I talked to leading up to today's report told me that the company was in such a technological and financial sweet-spot, that few investors were focused on the current quarter. There was the widespread belief that Cisco would print a solid quarter--which it did; there was the belief that Cisco would even maybe beat expectations--which it did.

But the conventional wisdom on the Street was that this report, more so than reports past, would be all about the guidance for the company's second fiscal quarter and CEO John Chambers' read on the global economy.

And on that point, Chambers re-iterated Cisco's long-term annual revenue growth range of 12% to 17%. He's forecasting 16% revenue growth for the company's second quarter 2008, and pointed out that at 17% revenue growth in its first quarter, Cisco is clearly operating at the high-end of its already stated guidance. He remains optimistic, just as he's been.

And his outlook for the massive technological changes happening all over the world, from data transfer to digital entertainment, remains as strong as it has been.

Chalk up that optimism to the upgrade cycle we're seeing with corporations globally; chalk it up to Cisco's recently announced plans to spend a whopping $16 billion in China over the next five years. The fact is, Cisco's shares may have outrun their realistic, current performance. A valuation issue. The reason why, with all the excitement surrounding these shares, Cowen initiated coverage today with a "neutral" rating on its shares.

But all of that aside, RBC's Sue said on our air that the near term volatility in this stock shouldn't dissuade investors from seeing the long-term opportunities Cisco may enjoy. The world is going broadband. The world is also exchanging more data online and wirelessly than ever before.

And thanks to Google , Yahoo mySpace, Facebook, Microsoft and dozens of other major players, we're all downloading and viewing video online more today than ever before. That's something Chambers spotlighted on the company's conference call.

Telecom is upgrading networks again. Roger McNamee from Elevation Partners said yesterday we haven't seen a hardware technology upgrade cycle this robust since Y2K. And guess what, Cisco is right in the middle of all of it. Yes, the company is being broadsided right now. But Cisco investors are probably used to that kind of thing. Think longer term; look at the trends; and patient investors may indeed see rewards that seem so hard to see today.

Questions? Comments?