Cisco’s stock trades at approximately 17 times forward earnings on a multiple price-earnings ratio. Typically, the pure play software names Google, Microsoft, and Salesforce are traded 45 times on average.
That valuation gap deserves to be closed – Cisco (CSCO) argued Wednesday afternoon during a closely watched investor day – because it no longer relies solely on low-margin routers and switches to deliver its quarterly earnings.
Instead, Cisco claims it is one of the largest software players in the game today, positioned in key growth markets such as hybrid work and public cloud that provide high-margin recurring revenue streams. Amid its focus on software, the company said its total addressable market will grow to $900 billion in the next four fiscal years, compared to $260 billion currently.
“What we tried to do yesterday was basically remind Wall Street what we told them in 2017, that we actually delivered on our execution,” Cisco chairman and CEO Chuck Robbins said on Yahoo Finance Live.
Wall Street reacted mixed to the presentation. Shares of Cisco fell slightly in Thursday’s trading.
The Street seemed to focus on Cisco’s long-term vision.
Cisco outlined revenue growth of 5% to 7% over the next four fiscal years. Earnings per share grow by a similar amount. The Street was looking for earnings growth of about 9%, likely assuming greater margin gains from shifting to selling more software.
Robbins said of the disappointing earnings outlook: “For some time we’ve been dealing with higher costs in our supply chain, so our gross margins are a bit under pressure from the price increases in goods sold that we’re seeing now. We thought it was sensible, both from an investment area and some of the pressure that we see in the supply chain, to make sure we guided in the right way and that’s what led us to the 5% to 7%. [growth]. We would expect that as the supply chain improves and software naturally makes up a larger percentage of our revenue, we expect it to get better.”