Supply chain worries turned this tech stock into a bargain

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Cisco CEO Chuck Robbins said the company’s order cancellation rates are below historical standards, despite product shortages.

Christopher Goodney / Bloomberg

As supply chain issues disrupt the tech industry, no company is highlighting the problem more than


Cisco Systems
.

The stock fell more than 6% on Thursday after the company reported financial results that were damaged by an array of component delays. And yet, it’s hard to find an enterprise technology company with a more compelling long-term outlook.

While there is some near-term noise for Cisco (ticker: CSCO), investors should hop on board now – last week’s sell-off made cheap stock even cheaper.

Cisco sees increased customer demand: cloud providers increase capital spending to meet growing demand, telecom companies deploy 5G networks around the world, and information technology companies ramp up spending as the pandemic subsides.

In its fiscal first quarter ended Oct. 30, Cisco saw order growth of 33%, up from 31% in the July quarter, with an impressive 200% growth in demand from “Webscale” cloud providers and a 60% increase in telecom operators. Cisco said it ended the October quarter with the highest order backlog in history.

Investors were too focused on supply chain issues to realize it. While revenue of $ 12.9 billion was up 8% from the previous year’s total, it was near the bottom of the company’s forecast range of 7.5%. at 9.5% and about $ 100 million less than Wall Street estimates. The company’s revenue outlook for the January quarter calls for growth of 4.5% to 6.5%. Halfway through, that means $ 12.6 billion in revenue, about $ 300 million less than the old Wall Street consensus. Cisco sells everything it can, but demand has dramatically exceeded its ability to meet customer needs.

Two months ago, I wrote a bullish column on Cisco, ahead of its first meeting with analysts in four years. I noted that the July quarter results were better than expected, due to some of the factors mentioned above including strong demand from cloud providers.

At the highly anticipated analyst meeting, Cisco said it expects annual profit and revenue growth of 5% to 7% through 2025, driven by an expanding portfolio of subscription businesses. And last week, Cisco repeated its growth projection in the same range for the July 2022 fiscal year, suggesting an acceleration in the second half of the fiscal year.

But right now, supply chain issues create multiple problems for the business. On the one hand, Cisco cannot source enough semiconductors, power supplies, and other key components to meet its needs. Manufacturing capacity is also an issue for Cisco, which does not do in-house manufacturing.

Cisco is providing financial support to contract manufacturing partners to increase capacity, and it is adding more suppliers to address a severe shortage of finished goods, but the bigger problem remains.

Cisco CFO Scott Herren said the company was “working day and night” to resolve component shortages.

This adds new expenses in the short term. To obtain parts faster, Cisco pays additional charges for expedited delivery of certain components. Herren says the air, sea and trucking sea routes all remain “swollen.”

Cisco has raised the prices of many products to offset rising costs, but it will take time for the increases to trickle down to the income statement, and the pressure on margins will persist for at least the next few quarters.

JP Morgan analyst Samik Chatterjee wrote last week that Cisco’s latest results offer “evidence of the high demand environment.” He admits supply constraints have worsened since the company released its July quarter results, but sees headwinds as transient, as the company’s acceleration in orders “further reflects underlying demand. pent-up network and IT infrastructure upgrades.

Chatterjee is overweight Cisco stocks and a price target of $ 70, around 30% above a recent close of $ 53.63.

Cisco isn’t the only tech company facing shortages. As I wrote last month, supply chain issues have hurt recent quarterly results for various hardware companies including


Apple

(AAPL), who said the problem was going to get even worse in the December quarter.

Supply chain issues will be a major talking point in upcoming PC makers revenue calls


Dell Technologies

(DELL) and


HP Inc
.

(HPQ). They are both expected to publish their results after the markets close on Tuesday.

The key question for investors in hardware inventories is whether orders are delayed or destroyed. For some consumer goods, shortages during the holiday shopping season might cause gift givers to simply buy something else – your loved ones might have to settle for a sweater on a laptop. But when it comes to IT infrastructure, Cisco’s competitors face the same challenges; everyone is limited by the offer. No one is better placed.

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 also get our share the other way around”.

Robbins noted that some competitors have delayed shipments to existing customers in order to provide new ones. But he also said Cisco’s cancellation rates were below historical standards. In short, most Cisco customers will just wait. Investors should do the same.

Write to Eric J. Savitz at [email protected]


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