Recently Cisco's (CSCO) quarterly earnings report disappointed many of its investors, and as a result, the company's stock price plunged. This last plunge takes the stock's price back to low levels not seen since last October. Currently Cisco's stock price is down 21% from its April high. Over the last several years, Cisco has always been a volatile stock and chances are it will bounce up and down in the next few years as well. Is the stock oversold at the moment? That may be a tough question to answer, but my humble answer is "yes."
Despite its relatively negative outlook in the short term, Cisco is a solid company with a lot of growth potential in the long term. Cisco announced that its sales deals were taking longer than usual to close because the clients were extra cautious about the slowing world economy. If Cisco's growth slows down in the short term, it will be mostly due to outside factors, which means when the economic conditions return to normal, things will be back to normal. This is different than when a company experiences slowing down due to competition or wrong moves of its management.
Currently Cisco has $9 of cash per share. This means that when the company's cash holdings are excluded, it has a P/E ratio of 5. The company's price-to-tangible-book- value ratio is only 2.8, which is one of the lowest among large technology companies. Even Apple (AAPL) has a price-to-tangible-book-value ratio of 5.4. IBM doesn't even have one due to its negative tangible book value. Furthermore, Cisco's annual revenues make up half of its market value, giving it a price to revenue ratio of 2.
If Cisco's growth slows down in the next quarter or two, this should only worry short term investors. The company will continue to grow aggressively through acquisitions and launching new products once the global slowdown comes to a halt. Also, Cisco still has a lot of room to grow in emerging markets such as China, India, Brazil and Russia. There is very high demand for technological solutions in developing nations and this demand is high enough to offset any slowdown in Europe.
In 2013, Cisco is expected to earn $1.73 per share, which gives it a forward P/E ratio under 10. If we exclude the company's cash holdings, this number drops below 5. Because we already saw a recent sell-off due to cautious outlook of the company's management, there isn't much downside risk left in the stock. The pessimistic outlook shouldn't worry investors too much either, as Cisco has a history of beating estimates. In the last seven quarters, Cisco always beat the analyst estimates as well as its own outlook estimations.
Furthermore, because Cisco has so much cash, it can continue to buy smaller companies in the near and distant future. The company's acquisitions help it offer new products and get exposure to new clients and these acquisitions are one of the main drivers of growth for Cisco. For example, very recently, the company announced that it would buy Truviso, which specializes in continuous query technology. This technology allows clients to monitor their network usage in real time by allowing them to analyze the data even before the data is stored in the network. Cisco's government and institutional clients can definitely make use of such technology.
In conclusion, I believe that Cisco is currently oversold due to fears of a slowing economy. Temporary problems should not affect a company's valuation in the long term, especially if that company is as solid as Cisco. The company's strong fundamentals and massive amount of cash make it a hard-to-resist stock.
Disclosure: I've been long CSCO for a long time and I'll increase my position within a couple days.