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Cisco Hit by Supply Challenges But Long-term Outlook and Dividend Profile Appear Stable

Cisco will be the latest battered tech stock when the market opens Thursday. Shares of the networking giant slumped as much as 15% in after-market trading following the firm's disappointing earnings results and guidance.
 
At the midpoint of guidance, Cisco expects sales in the current quarter to fall roughly 3% year-over-year, missing analyst estimates calling for nearly 6% growth. Adjusted earnings are also projected to miss consensus by about 13%.

On its conference call, Cisco blamed the shortfall on the war in Ukraine (Russia, Belarus and Ukraine account for 1% of total sales) and Covid-related lockdowns in China creating supply problems, emphasizing that the company has not seen a slowdown in demand.

Cisco has primarily faced challenges sourcing enough power supplies from China to complete its printed circuit boards and deliver finished hardware to customers. Many components that go into Cisco's power supplies come from Shanghai, which has been in lockdown since March 27.

Shanghai says it will open up on June 1, but Cisco is unsure what that means. Ultimately, the firm does not expect to catch up on its supply problem for at least one quarter and is redesigning some products for component diversity. These efforts could help improve supply within the next six months as well.

That said, rivals Arista Networks (ANET) and Juniper Networks (JNPR) did not report similar challenges when they released earnings last month. Whenever Cisco's results lag, investors worry the firm could be losing market share in its core switching and routing products.

Management argues that since Arista and Juniper's quarters ended in March rather than April like Cisco's, they did not experience a full period of China lockdowns. Cisco's much larger size may have made the firm's supply chain less nimble as well.

These seem like reasonable explanations for Cisco's weaker set of results, and both Arista and Juniper's stocks were off around 5% in after-hours trading, suggesting investors view these headwinds as industry-wide concerns rather than Cisco-specific problems.

Stepping back, we do not believe Cisco's earnings report revealed anything that alters the company's long-term outlook. 

Various Covid-related issues make it difficult to assess Cisco's latest market share trends, but concerns about share losses have existed for years. Despite intense competition and technological changes such as the cloud, Cisco has managed to eke out modest growth over the past decade. The firm's software and product order backlog hit a record this quarter, too. 

And while supply difficulties could always get worse in the near term, they seem unlikely to have a lasting impact on Cisco's massive installed base, brand recognition, robust distribution network, pristine balance sheet, or mix shift towards more software and subscriptions. These are the key factors that will help Cisco remain a cash cow with a safe, modestly growing dividend. 

If current pricing holds, Cisco's dividend yield will jump from 3.1% to 3.6% when the market opens, and the stock's forward P/E ratio will fall to around 13. Both valuation measures are not quite as attractive as they were during the depths of the pandemic but still compare favorably to Cisco's historical norms.

With its shares sporting a relatively undemanding valuation, Cisco may appeal to income investors who believe in the company's durability. We will continue monitoring Cisco's performance and provide updates as needed.

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