Cisco Systems (NASDAQ: CSCO) held its investor day on September 15th. Investors should pay close attention to this event as the tech giant discussed its long-term vision and announced new business goals. Here are three key takeaways from the event.
1. A large and expanding addressable market
Over the past decades, Cisco has dominated its core networking market. In its 2021 fiscal year, which ended July 31, revenue reached $ 49.8 billion, up 1% year on year. The company has generated growth through its massive footprint in networks and adjacent areas, such as cybersecurity and collaboration. In comparison, its competitors Juniper networks and Arista Networks generated $ 4.6 billion and $ 2.6 billion in revenue, respectively, over the past 12 months.
However, Cisco’s immense scale has a downside: The growth potential of the company’s core total addressable market, which management estimates at $ 260 billion by 2025, has become limited compared to its competitors.
But on Investor Day, management highlighted the company’s market expansions. Cisco is addressing high growth areas such as hybrid work, full stack observability (comprehensive monitoring of IT infrastructure and applications), cybersecurity, and the Internet of Things. The development of these key markets is expected to increase the company’s total addressable market, or TAM, by an additional $ 140 billion, reaching $ 400 billion by 2025.
Of course, Cisco will still need to deliver strong execution over the next several years to remain relevant in its existing and new markets.
2. Long-term growth in single-digit sales and profits
Given its large and growing opportunities, management expects revenue to reach a compound annual growth rate of 5% to 7% by 2025. This means Cisco’s revenue is expected to reach $ 62.9 billion. dollars in fiscal 2025, based on the midpoint of the outlook. In addition, executives expect adjusted earnings per share to be the revenue CAGR of 5% to 7%.
Investors should note, however, that these targets remain modest. Expected revenue growth slightly exceeds Cisco’s estimated 5% current APR growth. But it remains far from the expected CAGR of 18% of the company’s expansion markets. Additionally, EPS growth, in line with revenue growth, suggests that increasing scale will not lead to improved profitability due to additional investment.
Given these reasonable growth expectations by FY2025, and given that the company has met the targets it announced on its previous Investor Day in 2017, I expect the plans long term of the company come to fruition.
3. Sustainable and growing dividend
As a result, Cisco’s dividend, which currently pays an attractive 2.6%, looks secure.
Unsurprisingly, management has confirmed its intention to return at least half of the company’s free cash flow to shareholders, as it did during fiscal years 2020 and 2021, with dividends and share buybacks at. 59% and 61% of free cash flow, respectively. In addition, strong long-term single-digit revenue growth and profitability should drive dividends higher.
Additionally, Cisco can maintain its dividend during a potentially prolonged recession. By the end of July, it had accumulated a comfortable safety net of $ 24.5 billion in cash, cash equivalents and investments, against $ 11.5 billion in total debt.
A reasonable valuation
Overall, given Cisco’s outlook for single-digit revenue growth, you shouldn’t expect the stock to generate spectacular returns.
Still, you should consider adding it to your stock buy list in September. It offers a secure, attractive and growing dividend to dividend-oriented investors. It also trades at reasonable enterprise value-to-forward sales and forward price-to-earnings ratios of 4.3 and 16.7, respectively. Thus, the valuation of Cisco seems inexpensive in the context of the company’s realistic long-term growth plans.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.Source link