Cisco Systems (CSCO -11.95%) reported earnings results on Wednesday that beat expectations. However, management lowered its outlook for revenue and earnings for the near term, which is why the stock is down 11% as of 10:54 a.m. ET on Thursday.
The good and bad in Cisco’s earnings report
For the fiscal first quarter, revenue and adjusted earnings were solid, up 8% and 29% year over year, respectively. Cisco has been a beneficiary of the spending surge on artificial intelligence (AI), and this continued in the recent quarter, with enterprise investments in generative AI technology cited as one of the factors driving higher revenue in the quarter.
The problem is that customers are in the process of installing new equipment, which is slowing down new orders. Management noted this was most pronounced with larger service providers and cloud customers, and the declining order trend worsened in October.
While the stock’s year-to-date gains have been wiped out today, there are good reasons to expect the shares to bounce back.
Why Cisco stock might be a buy
Cisco is facing weaker revenue and earnings over the next few quarters than originally expected, but that appears to be temporary. Management expects revenue to pick up again in the second half the fiscal year.
In the long term, Cisco should continue to capitalize on the growing needs for AI and cloud security. The company recently announced its intent to acquire Splunk to enhance these capabilities.
The stock is now trading at its cheapest price-to-free-cash-flow valuation in the last 10 years. When the stock trades this cheaply, it tends to bounce back. Investors looking for a highly profitable, dividend-paying tech stock to anchor their portfolios could consider the sell-off a buying opportunity.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems and Splunk. The Motley Fool has a disclosure policy.