(Bloomberg) — Although big tech stocks have fueled the market’s advance in 2023, Cisco Systems Inc. She was a notable exception.
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As companies such as Alphabet Inc. and Microsoft Corp. and Apple Inc. Having lit up the Nasdaq 100 with gains of more than 30%, the largest maker of computer networking equipment has been slightly negative for the year.
Underperformance is nothing new for Cisco, whose shares have been in the doldrums for five years and are down 40% from a record set in 2000. While the company is ticking some defensive funds it was a big tech boost this year. Growth is expected to slow in the coming years as investors seek acceleration.
“Cisco is in that in-between space, it’s not growing fast enough to be attractive as a growth name, and it’s not so cheap that I really like it as a value stock,” said Siddharth Singhai, chief investment officer at Ironhold Capital. Management, whose company does not own the shares but is looking into the matter.
The problem is not current growth rates, but rather what analysts predict will be a future slowdown. Ahead of third-quarter results due after Wednesday’s close, estimates point to a 9.7% increase in revenue this fiscal year, which would be the fastest pace since 2010. Looking further afield, the pace is expected to slow to 4.4% in fiscal 2024 and Continue slowing down for at least two years after that.
In contrast, growth rates at rival Microsoft are expected to bottom out in fiscal 2023 before picking up going forward, a trend that applies to the technology sector in general, according to Bloomberg Intelligence.
Cisco’s grim outlook is reflected in its assessment. The stock trades at nearly 12 times forward earnings, discounting its 10-year average, as well as the Nasdaq 100. It also offers one of the highest free cash flow returns among the index’s constituents, as well as one of the highest indicated dividend yields. among stocks in the technology sector.
According to JPMorgan Chase & Co analysts, the valuation is likely to limit downside risks, though they recognize that “more downside” is possible with the results. Cisco has beat earnings forecasts every quarter for more than a decade, according to data compiled by Bloomberg.
Ash Shah, senior portfolio manager at Summit Global Investments, is among those who favor the stock as a defensive holding.
“It doesn’t have an exciting growth story, but it has very strong finances, it’s a cash flow machine, it’s a solid dividend yield, and it’s much cheaper than high-growth technology stocks,” he said.
Ironhold Capital Management’s Singhai agrees that Cisco is “much more attractive than high-profile names that aren’t profitable or don’t have cash flow.”
“The returns you get from that should be fairly stable,” he said. “However, we are not very excited about what these returns could be.”
Technical chart for today
Shares of Nvidia Corp. have doubled in 2023, pushing the chipmaker’s market capitalization beyond Berkshire Hathaway Inc. Having closed at its highest level since January 2022 on Tuesday, the company’s capitalization is about $722 billion, compared to $712 billion for Warren Buffett’s Berkshire. While the two have traded several times this year, Nvidia entered 2023 with a market capitalization of just under $360 billion, a far cry from Berkshire’s $682 billion.
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– With assistance from Subrat Patnaik.
(Updates to open the market.)
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