November 22, 2021
BARRON’S
31
TECH TRADER
The key question for investors in hardware stocksis whether orders are being delayed or destroyed.For Cisco,
the answer is clear.
Shortages Are RoilingTech Stocks–andCreating Bargains
estimates. The company’s revenueoutlook for the January quarter callsfor growth of 4.5% to 6.5%. At themidpoint, that implies revenue of$12.6 billion, about $300 million shortof the old Wall Street consensus. Ciscois selling everything it can, but de-mand has dramatically outstripped itsability to meet customer needs.
Two months ago, I wrote a bullish
column about Cisco, ahead of its firstmeeting with analysts in four years.I noted that July-quarter results hadbeen better than expected, due to someof the factors noted above, includingstrong demand from cloud vendors.
At the much-anticipated analyst
meeting, Cisco said it expected annualprofit and revenue growth of 5% to 7%through 2025, driven by an expandingportfolio of subscription-based busi-nesses. And this past week, Cisco re-peated its projection for growth in thatsame range for the July 2022 fiscalyear, suggesting acceleration in thesecond half of the fiscal year.
But right now, supply-chain issues
are creating multiple problems for thecompany. For one thing, Cisco can’t get
enough semiconductors, power sup-plies, and other key components tofulfill its needs. Manufacturing capacityis also an issue for Cisco, which doesn’tdo any in-house manufacturing.
Cisco is providing financial support
to contract manufacturing partners toexpand capacity, and it’s adding moresuppliers to address a severe shortageof finished goods, but the larger prob-lem remains.
Cisco Chief Financial Officer Scott
Herren says the company is “workingnight and day” to resolve the compo-nent shortages.
That’s adding new expenses in the
short term. To get parts faster, Cisco ispaying surcharges for expedited deliv-ery of some components. Herren saysthat air, ocean, and trucking shippingroutes all remain “snarled.”
Cisco has raised prices on many
products to offset the higher costs, butit will take time for the increases toflow through to the income statement,and pressure on margins will remainfor at least the next few quarters.
J.P. Morgan analyst Samik Chatter-
jee wrote this past week that Cisco’slatest results offer “proof to the strongdemand environment.” He concedesthat supply constraints have wors-ened since the company reportedJuly-quarter results, but he viewsthe headwinds as transient, with thecompany’s accelerating orders “morereflective of the underlying pent-updemand for network and IT infra-structure upgrades.”
Chatterjee has an Overweight rat-
ing on Cisco stock and a price target of$70, some 30% above a recent close of$53.63.
Cisco is hardly the only tech com-
pany dealing with shortages. As Iwrote last month, supply-chain woeshave hurt recent quarterly results at avariety of hardware companies, in-cluding
Apple
(AAPL), which said
the issue is going to be even worse inthe December quarter.
Supply-chain problems will be a
major topic of conversation in comingearnings calls from PC makers
Dell
Technologies
(DELL) and
HP Inc
.
(HPQ). They are both scheduled toreport results after the close of tradingon Tuesday. T
he key question for inves-tors in hardware stocks iswhether orders are beingdelayed—or destroyed. For
some consumer goods, shortages dur-ing the holiday shopping seasoncould result in gift-givers simply buy-ing something else—your loved onesmight have to settle for a sweaterover a laptop. But when it comes toIT infrastructure, Cisco’s rivals facethe same challenges; everyone is sup-ply-constrained. No one is better-po-sitioned.
Cisco CEO Chuck Robbins told me
that he sees no signs of lost orders sofar. “At some point, you lose some-thing to someone who can deliverfaster,” he said, while quickly addingthat “we are getting our share theother way, as well.”
Robbins noted that some competi-
tors have deferred shipments to exist-ing customers in order to supply newones. But he also said that Cisco’s can-cellation rates are running below his-toric norms. In short, most of Cisco’scustomers will simply wait it out. In-vestors should do the same.
BBy Eric J. Savitz
A
s supply-chain issuesroil the tech sector, nocompany underscoresthe issue more thanCisco Systems
.The
stock fell more than6% on Thursday after
the company reported financial re-sults that were dented by a panoplyof component delays. And yet, it’shard to find an enterprise tech com-pany with a more appealing long-term outlook.
While there will be continued near-
term noise for Cisco (ticker: CSCO),investors should hop aboard now—the selloff this past week has madea cheap stock even cheaper.
Cisco is seeing increased demand
across its customer base: Cloud com-puting vendors are ramping up capitalspending to meet soaring demand,telecom companies are rolling outtheir 5G networks around the world,and enterprise information-technol-ogy firms are accelerating spendingas the pandemic fades.
In its fiscal first quarter ended on
Oct. 30, Cisco saw 33% order growth,accelerating from 31% in the Julyquarter, with a whopping 200%growth in demand from “webscale”cloud providers and a 60% increasefrom telcos. Cisco said it exited theOctober quarter with the highestbacklog in its history.
Investors were too focused on the
supply-chain issues to notice. Whilerevenue of $12.9 billion was up 8%from the total a year earlier, it wastoward the low end of the company’sguidance range of 7.5% to 9.5% andabout $100 million shy of Wall Street
Christopher Goodney/BloombergCisco’s orders were up by a third in themost recent quarter, and CEO ChuckRobbins says the company’s backlog isat historic highs. But investors are tooworried about the supply chain to notice.