As supply chain problems plague the technology sector, no company emphasizes the problem more than that
Cisco Systems. The stock fell more than 6% on Thursday after the company reported financial results that were dented by a number of component delays. And yet it is difficult to find a business technology company with a more appealing long-term perspective.
Although there will still be short-term noise for Cisco (ticker: CSCO), investors should jump on board now – sales this past week have made a cheap stock even cheaper.
Cisco sees increased demand across its customer base: Cloud providers are increasing capital costs to meet the sky-high demand, telecom companies are rolling out their 5G networks worldwide, and information technology companies are increasing costs as the pandemic disappears.
In the first quarter ended on October 30, Cisco saw a 33% order growth, accelerated from 31% in the July quarter, with a huge 200% growth in demand from cloud providers and a 60% increase from telecommunications companies. Cisco said it left the October quarter with the highest backlog in its history.
Investors were too focused on supply chain issues to notice it. While revenue of $ 12.9 billion was up 8% from the total the year before, it was towards the low end of the company’s guidance range of 7.5% to 9.5% and around $ 100 million compared to Wall Street estimates. The company’s revenue outlook for the January quarter indicates a growth of 4.5% to 6.5%. At its core, that means revenue of $ 12.6 billion, about $ 300 million less than the old Wall Street consensus. Cisco sells everything it can, but demand has dramatically surpassed the ability to meet customer needs.
Two months ago, I wrote a bullish column about Cisco, before its first meeting with analysts in four years. I noticed that the results for the July quarter had been better than expected, due to some of the factors mentioned above, including strong demand from cloud providers.
At the much-anticipated analyst meeting, Cisco said it expected annual growth in profits and revenue of 5% to 7% through 2025, driven by a growing portfolio of subscription-based businesses. And this past week, Cisco repeated its projections for growth in the same area for the July 2022 fiscal year, indicating acceleration in the second half of the fiscal year.
But right now, supply chain problems are creating more problems for the company. First, Cisco cannot get enough semiconductors, power supplies, and other key components to meet the needs. Production capacity is also a problem for Cisco, which does not run its own production.
Cisco is providing financial support to contract manufacturing partners to expand capacity, and it is adding more vendors to address a severe shortage of finished goods, but the bigger problem remains.
Cisco Chief Financial Officer Scott Herren says the company “works day and night” to address component deficiencies.
It gives new expenses in the short term. To get parts faster, Cisco pays surcharges for fast delivery of certain components. The Lord says that air, sea and truck routes remain “spun”.
Cisco has raised the prices of many products to compensate for the higher costs, but it will take time for the increases to flow through to the income statement, and pressure on margins will remain at least in the coming quarters.
JP Morgan analyst Samik Chatterjee wrote last week that Cisco’s latest results provide “evidence of the strong demand environment”. He admits that supply constraints have worsened since the company reported results for the July quarter, but he sees the headwind as temporary, with the company’s accelerating orders “more reflected in the underlying pent-up demand for network and IT infrastructure upgrades.”
Chatterjee has an overweight rating on Cisco stock and a price target of $ 70, about 30% over a recent close of $ 53.63.
Cisco is hardly the only technology company dealing with shortages. As I wrote last month, supply chain problems have hurt the recent quarterly results of a number of hardware companies, including
apple (AAPL), which said that the problem will get even worse in the December quarter.
Supply chain problems will be a major topic of conversation in upcoming revenue calls from PC manufacturers
Dell technologies (DELL) and
HP Inc.. (HPQ). They will both report results after the stock exchange closes on Tuesday.
The key question for investors in hardware stocks is whether orders are delayed – or destroyed. For some consumer goods, a shortage during the Christmas shopping season can lead to gift givers simply buying something else – your loved ones may have to settle for a sweater over a laptop. But when it comes to IT infrastructure, Cisco’s rivals face the same challenges; all are supply limited. No one is better positioned.
Cisco CEO Chuck Robbins told me he sees no sign of lost orders so far. “At some point, you lose something to someone who can deliver faster,” he said, while quickly adding that “we get our share the other way too.”
Robbins noted that some competitors have postponed shipments to existing customers in order to deliver new ones. But he also said that Cisco’s cancellation rates are below historical standards. In short, most of Cisco’s customers will simply wait for it. Investors should do the same.
Write to Eric J. Savitz at firstname.lastname@example.org