Can Cisco Stock Rebound To $60?

Cisco stock (NASDAQ:CSCO) currently trades at $48.50 per share, roughly 17% below its pre-inflation shock high of $58.70 seen on December 29, 2021.  Cisco’s product sales have witnessed a slowdown as customers focused on utilizing the inventory purchased post the Covid-19 pandemic. Moreover, large companies, including cloud service providers and telecommunication players, have held back on network-related capital expenditures on account of economic uncertainty.  Separately, Cisco is also facing competition from smaller networking companies and this is also impacting its growth. However, Cisco stock has risen by about 29% from lows of $37.50 seen in September 2022.  Now for Q4 2024, the most recently reported quarter, Cisco saw revenue decline by about 10% year-over-year to $13.6 billion, while adjusted earnings per share fell by 24%. That said, both numbers came in ahead of estimates. Moreover, Cisco also indicated that its product order growth rose 14% year-over-year while rising by 6% excluding its acquisition of Splunk.  This indicates that things are getting better for the networking major.

Looking over a slightly longer period, CSCO stock has shown strong gains of 25% from levels of $40 in early January 2021 to around $50 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the increase in CSCO stock has been far from consistent. Returns for the stock were 46% in 2021, -22% in 2022, and 9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CSCO underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CSCO face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Returning to the pre-inflation shock level means that Cisco stock will have to gain roughly 21% if the stock recovers from $48.50 currently to its pre-shock highs of $58.70 per share. While the stock may recover to those levels, we presently estimate Cisco valuation to be around $55 per share, about 13% ahead of the current market price. While we believe that Cisco stock could see gains, we think that concerns about the global economy and increased caution by businesses on IT spending could limit the upside for the company in the near term. Cisco’s push into the recurring revenue model and its increasing focus on cybersecurity, via acquisitions, could also help the stock. Our detailed analysis of Cisco upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
• Since August 2023: the Fed has kept interest rates unchanged to quell fears of a recession and there is a possibility of rate cuts in 2024.

In contrast, here’s how CSCO stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Cisco Stock and S&P 500 Performance During 2007-08 Crisis

CSCO stock declined from nearly $22 in October 2007 to $10 in March 2009 (as the markets bottomed out), implying that the stock lost roughly 55% of its value through the drawdown. However, the stock rebounded strongly to over $16 by early 2010, an increase of about 64%. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach 1,124.

Cisco Fundamentals Over Recent Years

Cisco’s revenues rose from $49.3 billion in 2020 to about $57 billion in 2023 driven by higher networking product and security sales although revenue fell to $53.8 billion in 2024. While the company posted a net profit of $2.65 per share in 2020, the metric grew to $3.07 per share in 2023. However, earnings declined to about $2.54 in 2024 amid weaker sales and competitive pressures. 

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, Cisco (CSCO) stock has the potential for gains once fears of a potential recession are allayed.

[1] Returns as of 8/16/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates