He noted that Cisco shares are down 27% year-to-date. Investors are concerned about Cisco's market position and worry that its market share is being sold by Arista Networks (ANET.US) andJuniper Networks(JNPR.US) competitors grabbed, and both companies raised their 2022 growth guidance, while Cisco did not.
Investors are also concerned that Cisco could drop its previously given guidance for revenue and profit growth of about 6% annually through fiscal 2025. The company is likely to make large acquisitions to "accelerate the shift of revenue to more independent recurring sources," or even cut its gross margin estimates, as peers are doing.
Badri said investor sentiment was low ahead of the latest quarterly report despite the stock's low price.
"Overall, we believe the lower top-line growth expectations are prudent with a slight improvement in gross margins," Badri said. The slowdown in top-line was due to supply chain issues, as well as lower top-line revenues in Russia and Ukraine operations.
Badri also said it is "increasingly likely" that Cisco will announce a "significant" acquisition, given that its software business is heavily dependent on its hardware shipments. The deal is likely to dilute the company's equity.
While Cisco faces multiple negative factors, its stock price is cheap, its free cash flow yield is 7%, and its gross and operating margins remain largely unchanged. Cisco has also addressed supply chain issues and loss of market share in the large network equipment segment, and as a result, Badri sees Cisco as "attractive".
As of press time, Cisco fell 0.28% premarket to $46.64.