Cisco Earnings: We See Healthy Demand in Fiscal 2025, but Shares Reflect Aggressive AI Expectations

Key Morningstar Metrics for Cisco Systems

• Fair Value Estimate: $50.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Cisco Systems’ Earnings

We keep our $50 per share fair value estimate for Cisco Systems CSCO as we leave our long-term forecasts intact after its October-quarter results. We believe Cisco is solidly back in a normal demand environment after two years of choppy results stemming from overordering and subsequent inventory digestion at customers. We still like the acquisition and integration of Splunk, but view this as a minority driver relative to the larger networking business.

We also like Cisco’s emerging growth from artificial intelligence networking infrastructure, but we don’t expect this to be a massive driver. Nor do we expect Cisco to hold a strong market share in AI networks. Shares look overvalued to us after rising more than 25% since Cisco’s last earnings release in August. We believe current levels overestimate the firm’s long-term growth opportunity, likely due to some overexuberance around the firm’s AI exposure.

October-quarter sales rose 2% sequentially but fell 6% year over year to $13.8 billion. We expect the year-over-year decline to be the last for Cisco this fiscal year, which results from overordering dynamics that lasted through the October quarter last year. We see sequential growth reflecting healthier and more stable demand. Overordering a year ago was concentrated in networking, and these sales fell more than 20% year over year this quarter. Security sales rose 100% year over year, resulting from the inorganic contribution from Splunk. We see 13% sequential security growth positively and as mostly organic in the second full quarter with Splunk.

Cisco raised its fiscal year 2025 guidance in line with our forecast for 4% sales growth. The January-quarter sales outlook of $13.85 billion at the midpoint also agreed with our model and implied 8% year-over-year growth over depressed demand last year. We believe Cisco can grow sequentially through fiscal 2025, under more normalized networking demand and continued strong momentum for security sales.