Trading On margin

Cisco CEOs on Wall Street: Think of Us Differently

Cisco shares are trading at around 17 times forward earnings on a multiple price / earnings basis. Most pure play software names Google, Microsoft, and Salesforce trade an average of 45 times.

This valuation gap is worth closing – Cisco (CSCO) argued on a closely watched investor day Wednesday afternoon – because it no longer relies solely on low-margin routers and switches to build its quarterly numbers.

Instead, Cisco says it is one of the biggest players in the software industry these days, positioned in key growth markets such as hybrid work and public cloud that deliver data streams. recurring income rich in margin. Amid the focus on software, the company said its total addressable market is expected to grow to $ 900 billion in the next four fiscal years, up from $ 260 billion currently.

“What we tried to do yesterday was basically remind Wall Street what we told them in 2017, that we actually respected our execution,” said Cisco CEO Chuck Robbins, on Yahoo Finance Live.

Wall Street reacted in a mixed way to the presentation. Cisco shares edged down in Thursday’s trading.

The Street seemed to focus on Cisco’s longer-term prospects.

Cisco has reported sales growth of 5-7% over the next four fiscal years. Earnings per share increase by a similar amount. The Street was looking for about 9% profit growth, probably assuming a larger margin increase from switching to selling more software.

Said Robbins of the disappointing earnings outlook, “For a period of time into the future, we experience higher costs in our supply chain, so our gross margins are under a bit of pressure from increases in the cost of goods sold. we’re seeing right now. And that’s going to be with us for a while. We thought it was careful of both an area of ​​investment and some of the pressure we see in the chain. ‘sourcing, to make sure we guided appropriately and that’s what drove us to the 5% to 7% [growth]. We would expect that, over time, as the supply chain improves and software makes up a larger percentage of our revenue, we would expect it to improve. “

Brian Sozzi is an editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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