Cisco’s [CSCO] share price is outperforming both the S&P 500 and fashionable SaaS tech stocks this month.
That’s quite a turnaround from last year, when the maker of enterprise IT solutions was caught on the back foot by the shift to home working. Now, with people returning to the offices and companies looking to increase IT spend, there could be good news ahead for Cisco’s share price.
Cisco's last set of quarterly earnings were flat year-on-year. However, the company has seen a spate of analyst upgrades in the past few months and the company's CEO, Chuck Robbins, said that the company was "seeing encouraging signs of strength across our business showing how our technology will be a powerful engine for recovery and growth," in a statement accompanying last quarter’s earnings.
Should this “strength” emerge in the upcoming earnings, Cisco’s share price could see a bounce.
When is Cisco reporting earnings?
What to expect in Cisco’s earnings?
Wall Street is expecting Cisco to post earnings of $0.82, up from $0.79 from the same quarter last year. Revenue is pegged at $12.56bn, up 4.8% from the $11.98bn seen last year. Cisco itself has guided for earnings of between $0.80 and $0.82 per share, with revenue growing 3.5% to 5.5% year-on-year.
Will Cisco post an earnings beat? Well, in the past four quarters, the tech company has topped Wall Street expectations. Last quarter, Cisco delivered earnings of $0.79 per share, topping the forecasts of $0.76 per share.
Cisco's forecasted Q3 revenue - a 4.8% YoY rise
What’s powering Cisco’s share price gains?
Cisco’s share price is flat over the past month, but has risen 4.40% since 4 May (as of 17 May), spurred upwards by a spate of analyst upgrades. The logic may be that Cisco was a laggard last year as the pandemic led to homeworking en masse and investors piled into the companies enabling this — think Alphabet [GOOG], Salesforce [CRM], Slack [WORK] and Zoom [ZM]. Now, with white-collar workers starting to return to the office, IT spending on enterprise projects is set to increase.
“We could see a shift in IT spending toward enterprise projects that were left behind in Covid. Between enterprise spending, better valuations, and a possible lift from infrastructure, you’re seeing names like Cisco, Hewlett Packard Enterprise [HPE], and IBM [IBM] go up and to the right,” Ted Mortonson, of Robert W. Baird & Co., told Bloomberg in an article dated 16 April.
“We could see a shift in IT spending toward enterprise projects that were left behind in Covid. Between enterprise spending, better valuations, and a possible lift from infrastructure, you’re seeing names like Cisco, Hewlett Packard Enterprise, and IBM go up and to the right” - Ted Mortonson, of Robert W. Baird & Co.
Wolfe Research analyst Jeffrey Kvaal upgraded Cisco in April, citing strong IT spend that could provide a “tailwind” through 2022, while JPMorgan and Goldman Sachs upgraded the stock in March for similar reasons. JPMorgan analyst Samik Chatterjee noted that “strong top line” growth for Cisco has previously correlated with upward movement in Cisco’s share price.
Good news for old school tech stocks like Cisco, HP and IBM. Bad news for the pandemic SaaS stalwarts that have seen their stocks plunge over the past month — Zoom is down circa 4.75% for the month and 14.18% for the YTD (through 17 May’s close).
What’s happening with the SaaS investment theme?
The SaaS investment theme has been languishing below mid-table on our thematic investment screener over the past month. It’s down 6.90% for the month (as of 17 May), with stocks like Zoom, DocuSign [DOCU], ServiceNow [NOW] and Twilio [TWLO] responsible for the dip. Still, over the 12-month period the SaaS theme is still up 42.36%. So, is this a temporary trend or a longer-term sell off as stocks that surged during the pandemic pull back?
Among the analysts tracking the stock on Yahoo Finance, Cisco’s share price has an average $54.50 price target. Hitting this would represent a modest 3% upside on 17 May’s closing price. For income seeking investors, Cisco has a 2.87% forward dividend yield.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.