Cisco Q3, Outlook Hit By Supply Chain Woes; FVE to $54

We are lowering our fair value estimate for narrow-moat Cisco Systems CSCO to $54 per share from $56 after its third-quarter results and outlook caused us to temper our outlook for growth. Cisco grossly missed our growth expectations in the third quarter, and its fourth quarter outlook was appreciably lower than we anticipated. Its shares were pushed down more than 10% after reporting due to the soft quarter and outlook. We view shares as attractive for long-term investors as we believe supply chain headwinds will eventually dissipate, while Cisco will remain an essential provider of IT necessities, a resilient operator, and a shareholder-focused firm.

Cisco's third-quarter revenue was flat year over year, as sales were impacted by the war in Ukraine, COVID-19 lockdowns in China, and the prior year's quarter having an extra week. The company stopped operations in Russia and Belarus in March, which had a 2% impact on growth. Cisco's third quarter includes April, which had the start of the latest round of lockdowns in China. Not being able to procure and receive components inhibited the final weeks of the quarter and Cisco's outlook. Although Shanghai expects to end lockdowns on June 1, Cisco's soft outlook is attributable to unknowns regarding potential logistics bottlenecks. While we expect a slightly lower growth profile to persist, we are upbeat on Cisco's remaining performance obligations, or RPO, growing by 7% year over year and the company posting record adjusted earnings of $0.87 in the quarter. Product orders grew 8% year over year, with commercial up 19%, public segment growing by 4%, service providers expanding by 8%, while enterprise was flat. We believe the forward-looking indicators of RPO and product orders indicate solid demand for Cisco's products. Since most of its peers' quarters did not include April, Cisco's results and outlook may be a harbinger of temporary softness due to supply chain challenges becoming exacerbated across the industry.