500-445 thinking - Cisco Contact Center Enterprise Chat and Email (CCECE) Updated: 2024

Searching for value in tech in an extended market

Investors searching for value stocks within tech may want to put Cisco (NASDAQ:CSCO) on their watchlist for a conservative 3-5% upside idea over the coming 4-6 months. The company has struggled to keep pace with the ferocious rally that popular themes within AI, Semiconductors, and Big Tech have benefited from in 2023. As investors start thinking about where pockets of the market may possibly still have de-risked levels, we think investor attention will give Cisco a modest lift in the coming weeks and months - though enthusiasm will be capped due to its single-digit growth profile.

We believe that CSCO's recent bounce off 47.5/share can be durable and that the next target is 51.44-52/share, an area that we believe can be reached within Q1-Q2 2024. Due to a low de-risked valuation, we think that the 45-47/share level is essentially a demand zone where institutional investors will defend the stock in the case of further equity weakness. The mature characteristics of its business model means that the company's beta relative to the S&P 500 will remain low, so this is a low-volatility type of upside idea if markets can remain stable.

Let's discuss their recent business fundamentals and potential catalysts

After Cisco's latest earnings quarter back from November 2023, the Street revised forward EPS estimates lower as management provided softer guidance for the rest of the fiscal year. The company guidance implies a 13% sequential sales decline and the management team lowered their Fiscal 2024 revenue outlook by 5%. This was primarily due to tempered expectations for large enterprises implementing Cisco's equipment before restarting their buying cycle for the next generation of inventory. We believe that the recent stock's correction reflects that the rosy 2023 fiscal results along with its strong backlog may be not have the same easy momentum in 2024.

Behind the Street's contained enthusiasm to permit Cisco a durable recovery is the fact that Cisco previously called for roughly 400 basis points of operating margin compression to around 32%, which is a primary reason behind weaker volumes. Given how high of a weight operating margins play into Wall Street valuation models, it is likely the Sell Side needs to see margins stabilize or see a modest lift before they upgrade the Stock.

As a mature player in enterprise technology, growth rate estimates for Cisco range between 3-5% and this makes the stock a tempered Hold in an environment where other technology companies (especially semiconductors) are growing in the 15-30% top line region.

Of course, Cisco's valuation on both an earnings and EBITDA basis fairly reflects this with a modest 12.8X forward P/E multiple, which is essentially near the trough of its year-to-date valuation range.

Cisco's EBITDA valuation multiple takes the company trading back to historical valuations back near the bear market lows of Summer/Fall 2022.

In terms of its overall business model and evaluation of its outlook, I want to share some helpful statistics to help readers understand Cisco's positioning in the marketplace.

The company currently generates most of its sales from its Secure, Agile Networks segment (51% of FY 2023 sales), followed by Internet of the Future (9%), Collaboration (7%), End-to-End security (7%), and Services (25%) being the remainder.

The growth levers that I believe the buyside are focused on include the Collaboration and the End-to-End Security group segments as Cisco has been heavily investing in these two areas to move away from legacy hardware. The company has done several acquisitions to support the new offerings in this space (such as Spunk). Cybersecurity is a vastly growing field and companies in that category are commanding high valuations. If Cisco can successfully make cybersecurity a larger portion of their forward revenues and EBITDA, the recurring nature of future cash flows will allow the company to eventually hold a higher multiple rather than the 13.5X forward multiple it currently commands. I believe future quarters will shed more light on their ability to compete in that area.

Additional catalysts for Cisco include the WiFi 6 upgrade cycle, 5G core implementations as well as AI network development. The high demand for data center solutions and migration to cloud networking should eventually be a favorable macro landscape for Cisco's fundamental positioning.

Risks, thoughts on Entry & Valuation

With the combination of Cisco's lower relative valuation and lowered 2024 estimates since its last quarter in contrast with its recently increased share buyback program and strong financial cash position (over $26.3 billion in cash), we think Cisco's downside is rather limited (although upside also has limits).

The company is currently a leader in Ethernet Switches with about 45-46% market share. The largest threat that I currently see is that competitors such as Arista Networks which has 11.4% of the market share and Huawei which now has 6% of the market could become formidable forces as recent trends have pointed to market share advances for both firms. In the coming quarters, we will see if Cisco's gross margins - which are often a great indicator for competitive pressures - are impacted by Arista and Huawei's share gains.

If Cisco can defend status quo business performance and maintain low single digit revenue performance over the coming 3 years (currently estimated at a -4% sales decline in FY 2024 but a rebound of 4-5% in FY 2025 and 2026), the stock may drift back to its median historical valuation of 13-14X forward earnings (now 12.8X) in the coming quarters.

In an expensive market in technology, Cisco has been a laggard (rightfully so due to its low growth profile). But the company still commands a long-term top line growth rate in the single digits and given its strong free cash flow generation, I think the stock has about 3-5% upside to revisit the 50-53/share area in the coming 4-6 months.

Once that conservative upside drift target is met, its mature business model will likely make its stock stay range-bound until investors have more clarity in its upcoming earnings reports.

As we transition from one year to the next, it's a season of reflection and looking forward. As an analyst, the end of the year is a time to learn from past work, analyze its outcomes and consider its potential impact on the future.

In 2023, enterprise data management (EDT) solutions underwent significant changes due to the influx of generative AI technologies. These technologies have fundamentally altered how businesses approach data management, analysis and usage. In this post, I’ll review some of 2023’s highlights in this field.

How Different Areas Of EDT Are Evolving

Over the past year, there have been promising developments in EDT across several key areas. These include data management itself, where the focus has been on using AI to Boost how data is organized and accessed. The data cloud sector has also experienced growth, with more businesses adopting cloud-based solutions because of their flexibility, scalability and facility for integrating tools that handle unstructured data.

In data protection and governance, there has been a continuous effort to enhance security measures to safeguard sensitive information. Database technologies have also improved, particularly in handling and processing large data volumes more efficiently by incorporating generative AI.

Recent advancements in data integration and intelligent platforms have been geared towards better aggregating data from multiple sources, allowing for more comprehensive data analysis. The integration of AI and ML has further enhanced the capabilities of these platforms, improving data analysis interpretation and offering more profound and insightful analytical outcomes.

Full disclosure: Amazon Web Services, Cisco Systems, Cloudera, Cohesity, Commvault, Google Cloud, IBM, LogicMonitor, Microsoft, MongoDB, Oracle, Rubrik, Salesforce, Software AG, Splunk, and Veeam are clients of Moor Insights & Strategy, but this article reflects my independent viewpoint, and no one at any client company has been given editorial input on this piece.

Bringing AI To Data Management—And Vice Versa

“In a way, this AI revolution is actually a data revolution,” Salesforce cofounder and CTO Parker Harris said during his part of this year’s Dreamforce keynote, “because the AI revolution wouldn't exist without the power of all that data.” Harris's statement emphasizes the vital role of data in businesses and points to the increasing necessity for effective data management strategies in 2024.

As data becomes more central, the demand for scalable and secure EDT solutions is rising. My recent series of articles focusing on EDT began with an introductory piece outlining its fundamental aspects and implications for business operations. This was followed by a more in-depth exploration of EDT, particularly highlighting how it can benefit businesses in data utilization. These articles elaborated on the practical uses and benefits of EDT and its importance in guiding the strategies and operations of modern businesses.

As businesses continue to leverage generative AI for deeper insights, the greater accessibility of data is set to revolutionize how they manage information. This development means enterprises can now utilize data that was previously inaccessible—a move that highlights the importance of data integration for both business operations and strategic decision-making. For instance, untapped social media data could offer valuable customer sentiment insights, while neglected sensor data from manufacturing processes might reveal efficiency improvements. In both cases, not using this data equates to a missed opportunity to use an asset, similar to unsold inventory that takes up space and resources without providing any return.

Revolutionizing Data Cloud Platforms

Incorporating AI into data cloud platforms has revolutionized processing and analyzing data. These AI models can handle vast datasets more efficiently, extracting previously unattainable insights due to the limitations of traditional data analysis methods.

Over the year, my own collaborations with multiple companies suggested the range of technological progressions. As I highlighted in a few of my articles, Google notably improved its data cloud platform and focused on generative AI with projects including Gemini, Duet AI and Vertex AI, reflecting its solid commitment to AI innovation. Salesforce introduced the Einstein 1 Platform and later expanded its offerings with the Data Cloud Vector Database, providing users with access to their unstructured enterprise data, thus broadening the scope of their data intelligence. IBM also launched watsonx, a platform dedicated to AI development and data management. These moves from major tech firms reflect a trend towards advanced AI applications and more sophisticated data management solutions.

At the AWS re:Invent conference, I observed several notable launches. Amazon Q is a new AI assistant designed for business customization. Amazon DataZone was enhanced with AI features to Boost the handling of organizational data. The AWS Supply Chain service received updates to help with forecasting, inventory management and provider communications. Amazon Bedrock, released earlier in the year, now includes access to advanced AI models from leading AI companies. A new storage class, Amazon S3 Express One Zone, was introduced for rapid data access needs. Additionally, Amazon Redshift received upgrades to Boost query performance. These developments reflect AWS's focus on integrating AI and optimizing data management and storage capabilities.

Recent articles have highlighted Microsoft's role in the AI renaissance, one focusing on the launch of Copilot as covered by my colleagues at Moor Insights & Strategy, and another analyzing the competitive dynamics in the AI industry. Additionally, Microsoft has expanded its data platform capabilities by integrating AI into Fabric, a comprehensive analytics solution. This suite includes a range of services including a data lake, data engineering and data integration, all conveniently centralized in one location. In collaboration, Oracle and Microsoft have partnered to make Oracle Database available on the Azure platform, showcasing a strategic move in cloud computing and database management.

Automating Data Protection And Governance

With the growing importance of data privacy and security, AI increasingly enables the automation of data governance, compliance and cybersecurity processes, reducing the need for manual oversight and intervention. This trend comes in response to the rise in incidents of data breaches and cyberattacks. AI-driven systems have become more proficient at monitoring data usage, ensuring adherence to legal standards and identifying potential security or compliance issues. This makes them a better option than traditional manual approaches for ensuring data safety and compliance.

Security is not only about protecting data but also about ensuring it can recover quickly from any disruptions, a quality known as data resilience. This resilience has become a key part of security strategies for forward-thinking businesses. Veeam emphasized “Radical Resilience” when it rolled out a new data protection initiative focused on better products, improved service and testing, continuous releases and greater accountability. Meanwhile, Rubrik introduced its security cloud, which focuses on data protection, threat analytics, security posture and cyber recovery. Cohesity, which specializes in AI-powered data security and management, is now offering features such as immutable backup snapshots and AI-driven threat detection; in 2023, it also unveiled a top-flight CEO advisory council to influence strategic decisions. Commvault has incorporated AI into its services, offering a new product that combines its SaaS and software data protection into one platform.

LogicMonitor upgraded its platform for monitoring and observability to include support for hybrid IT infrastructures. This enhancement allows for better monitoring across an organization's diverse IT environments. Additionally, Cisco has announced its intention to acquire Splunk. This acquisition will integrate Splunk's expertise in areas such as security information and event management, ransomware tools, industrial IoT vulnerability alerting, user behavior analytics and orchestration and digital experience monitoring that includes visibility into the performance of the underlying infrastructure.

Key Changes for Database Technology

Advancements in AI and ML integration are making database technology more intuitive and efficient. Oracle Database 23c features AI Vector Search, which simplifies interactions with data by using ML to identify similar objects in datasets. Oracle also introduced the Fusion Data Intelligence Platform, which combines data, analytics, AI models and apps to provide a comprehensive view of various business aspects. The platform also employs AI/ML models to automate tasks including data categorization, anomaly detection, predictive analytics for forecasting and customer segmentation, workflow optimization and robotic process automation.

In my previous discussion about IBM's partnership with AWS, a major highlight is the integration of Amazon Relational Database Service with IBM Db2. This collaboration brings a fully managed Db2 database engine to AWS's infrastructure, offering scalability and various storage options. The partnership between AWS and IBM will likely grow as the trend of companies forming more integrated and significant ecosystems continues.

Database technology also evolved with MongoDB queryable encryption features for continuous data content concealment. MongoDB Atlas Vector Search now also integrates with Amazon Bedrock, which enables developers to deploy generative AI applications on AWS more effectively. It’s also notable that Couchbase announced Capella iQ, which integrates generative AI technologies that exploit natural language processing to automatically create sample code, data sets and even unit tests. By doing this, the tool is streamlining the development process, enabling developers to focus more on high-level tasks rather than the nitty-gritty of code writing.

Leveraging Data Integration Platforms

Generative AI technologies have also improved data integration capabilities by using historical data, analyses of trends, customer behaviors and market dynamics. This advancement is particularly influential in the finance, retail and healthcare sectors, where predictive insights are critical for strategic and operational decisions. There's been a shift towards adopting data lake house architectures, which combine the features of data lakes and data warehouses to help meet the challenges of handling large, varied data types and formats, providing both scalability and efficient management. This evolution in data architecture caters to the growing complexity and volume of data in various industries.

Integrating various data sources is crucial for many companies to enhance their business operations. Software AG has introduced Super iPaaS, an evolution of the traditional integration platform as a service (iPaaS). This advanced platform is AI-enabled and designed to integrate hybrid environments, offering expansive integration capabilities. Cloudera has also made strides with new data management features that incorporate generative AI, enabling the use of unstructured data both on-premises and in cloud environments. Its hybrid approach effectively consolidates client data for better management. Informatica's intelligent data management cloud platform integrates AI and automation tools, streamlining the process of collecting, integrating, cleaning and analyzing data from diverse sources and formats. This creates an accessible data repository that benefits business intelligence and analytics.

That’s a Wrap!

In my collaborations throughout the year with various companies, one key theme has emerged in this AI-driven era – data has become even more fundamentally important for businesses. It's clear that the success of AI heavily relies on the quality of the data it uses, and AI models are effective only when the data they process is accurate, relevant and unbiased.

For example, in applications such as CRM or supply chain optimization, outcomes are directly influenced by the data’s integrity. Instances where AI failed to meet expectations could often be traced to poor data quality, whether it was incomplete, outdated or biased. This year has highlighted the necessity of not just collecting large amounts of data but ensuring its quality and relevance. Real-world experience underscores the need for strict data governance and the implementation of systems that guarantee data accuracy and fairness, all of which are essential for the effective use of AI in business.

As AI technology advances and data quality improves, the use of generative AI in understanding and engaging with customers is becoming ever more prominent. Backed by good data management, this enhances the customer experience by making the customer journey more personalized and informative. It allows businesses to gain valuable insights from customer interactions, helping them continuously refine and Boost their offerings and customer relations. I expect this trend to grow, further emphasizing the role of AI in customer engagement and shaping business strategies. In fact, this symbiotic relationship between AI-driven personalization and customer engagement is becoming a cornerstone of not only data management strategy but modern business strategy overall, significantly impacting how companies connect with their customers.

Wrapping up, it's evident that the emphasis on data quality is critical for improving AI's performance. Data management, cloud services, data protection and governance, databases, data integration and intelligent platforms have all significantly contributed to the advancement of AI. In 2024, I expect we’ll see even more emphasis on ensuring the accuracy and relevance of data so that AI can provide dependable insights.

‘We used to joke that we had an enterprise mini-me strategy. We would take enterprise products and paint them a different color. In this case, we have purpose-built solutions,’ Cisco CEO Chuck Robbins tells CRN at the 2019 Partner Summit.

Cisco on Wednesday unveiled its new brand to help channel partners go after more small to midsized business customers: Cisco Designed for Business.

Cisco Designed for Business is a curated portfolio that includes traditional products, such as Meraki and WebEx, and other offerings that have been specifically created and priced for small business customers, Marc Monday, global head of small business at Cisco, said at the tech giant's 2019 Partner Summit in Las Vegas.

Cisco purchased Linksys in 2003 for $500 million as a networking option for the SMB market but sold the assets to Belkin in 2013. After selling Linksys, Cisco's SMB offerings consisted of a class of switches and routers that were a different color than the enterprise portfolio, said Faisal Bhutto, executive vice president of enterprise networking, cloud and cybersecurity for Computex, a Cisco Gold Quad Master-level partner.

Cisco CEO Chuck Robbins told CRN at this year's partner summit that the company's efforts around targeting SMB customers is different than its previous efforts because the company has developed a "holistic" strategy as opposed to taking what it already had and trying to retro-fit those solutions for SMBs.

"We used to joke that we had an enterprise mini-me strategy. We would take enterprise products and paint them a different color," Robbins said. "In this case, we have purpose-built solutions and our team has done a great job of segmenting our customers and working with our partners to define programs, sales strategies, and incentives that all line up with what's needed in that segment. We have a huge opportunity for share there, and we are going to need to drive our programs very effectively with our partners."

[Related: Cisco Lifecycle Push Includes Partner Rewards, Customer Entitlements To Partner Services]

Houston-based Computex thinks that the Meraki portfolio will be the best fit for small business customers. The firm is having a lot of success selling Meraki solutions to its own base of small business clients, said Worth Davis, CTO for Computex.

"Meraki fits very well into the S in SMB, but it's been moving up into the midmarket," Bhutto said. "I think this time around, if Cisco can just take [Meraki] and focus on the down-market, it will play well since they started out competing with Ubiquiti and others."

Cisco Designed for Business brand includes Webex for Collaboration; Firepower, Umbrella and DUO for Security; UCS and Hyperflex Edge for small-scale application compute; Cisco Business for on-prem networking; Meraki Go for easy, app-managed cloud Wi-Fi. New product developments include Cisco Business Wireless Access Points and a new Meraki Go offering. Cisco is also making the Catalyst 1K switch affordable for small businesses, the company said.

SMB customers can purchase Cisco Designed For Business solutions through their trusted partner, whether that's a VAR, a distributor, or if they prefer to buy digitally through a partner via a marketplace, Monday said.

"It's important for us to meet them where they are, and then meet them with the channel partners they prefer to work with," he said.

Partners should expect Cisco to drive customer awareness for the new portfolio, as well a dedicated partner-focused sales force for small business.

"We need to de-mystify the idea that we are too expensive and too complex. It's just not true," Monday said. "For partners, there's virtue in the bigness and support of Cisco."

Cisco has "barely scratched the surface" on the SMB opportunity, Jim Walsh, Cisco's senior vice president of growth marketing, told partners during his keynote on Wednesday. Cisco Designed for Business was designed to make it easier to buy, manage, and support IT and the effort includes new marketing tools and resources for partners, he said.

"Small businesses don't wake up thinking about technology, they are thinking about how they are going to drive business," Walsh said. "We need to make it easy for them to connect, compute, and collaborate securely."

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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.