You might know Cisco Systems (NASDAQ: CISCO) as the alive dinosaur in the IT and network world. Cisco’s strong Q4 earnings reaffirm its king like status. However, their Q1 earnings guidance disappointed Wall Street. Some investors are confused as to whether or not to jump on the CSCO train. Because on the one hand you have stellar Q4 and FY 2020 financials, whereas on the other hand, you have weak forecasted earnings for this quarter. Thus, today’s article will provide our readers with some perspective on yesterday’s earnings and what you need to know before investing.
Table of contents 1. Investors sell on positive earnings what is going on? 2. Everything you need to know before Investing in Cisco
Why did Cisco’s earnings cause investors to sell?
Cisco, among other tech networking companies, saw positive earnings for Q3 and Q4 because of COVID-19. The stay at home economy saw businesses upgrade their online infrastructure for better communication and faster operational speed. Overall, the current climate saw CISCO report the following for Q4.
- Adjusted EPS of 80 cents which beat Wall Street’s estimate of 74 cents
- Revenue of $12.15 billion which came in above analysts estimates of $12.08 billion
- Cisco’s earnings for Q4 were $2.64 billion which was a 19% increase Year on Year (YOY)
If you looked at these financials in isolation you would be impressed. Especially as CFO Kelly Krammer said this about earnings. “We executed well in Q4, delivering strong margins despite the very challenging environment… performance obligations grew strongly in the quarter, reflecting the strength of our portfolio of software and services”. Despite the positive earnings, CSCO plummeted 6% in after-hour trading. The fall was because Cisco Q1 2021 guidance came in lower than Wall Street’s expectations. For example, earnings per share of 71 cents fell below the Streets estimate of 75 cents. To add insult to injury, Cisco flagged that Q1 revenue should likely decline by 9% to 11% YOY. Ultimately signalling that Cisco’s Q3,Q4, sales frenzy is returning to more natural and possibly worse than normal levels. Overall weak earnings guidance for Q1 2021 instantly changed the sentiment from bullish to bearish.
Here is everything you need to know before investing in Cisco
Before I begin, I am obliged to remind our viewers that this is not advice but rather investment commentary from extensive research
Coronavirus distortion theory – Cisco’s earnings
Earnings season is always volatile. However, this year retail investor optimism increased the volatility. Tech companies surged in Q3 and Q4 because of an abnormal amount of sales. For example, Zoom, Netflix, and Amazon were given extreme valuations come Q3 and Q4 earnings. However, past performance is no indicator of future performance. In the case of Cisco that phrase is no further from the truth. While the IT and Network company surged throughout the beginning to middle of the year it does not mean the growth will continue. Thus, investing in Cisco on the basis that they can sustain their Q3,Q4 revenue growth is not the smartest play.
Low volatility and transition to a dividend stock
Cisco’s volatility will become smaller and smaller. Because earnings season passed, the bull run is growing at a slower rate, and most businesses are finishing up their digital transformation. Consequently, Cisco will likely trade like a blue-chip from here on out. Think of the CSCO’s growth as defensive instead of aggressive. Especially because investors kicked Webex, a video conferencing company that Cisco owns, to the curb as the market backed Zoom. In saying that, all signs suggest long-term growth. Overall, YIG sees Cisco as a tech company that will grow at a snail-like rate with a 3% dividend yield.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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Written by Patrick McLoughlin, Senior Manager of YIG.