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Cisco Systems: A DCF Valuation

Mar. 07, 2021 11:54 AM ETCisco Systems, Inc. (CSCO)39 Comments
Alex Galanis profile picture
Alex Galanis


  • While the stock price has appreciated over the past decade, Cisco has yet to reach dot-com era price levels.
  • Cisco exhibits healthy financials and growing dividend distributions.
  • As the company shifts towards more participation in the software industry, revenue and profitability are expected to increase.
  • A DCF valuation indicates that the stock trades at a minor discount compared to fair value.


Cisco Systems (NASDAQ:CSCO) rose into prominence during the dot-com era, with a dominant presence in the technology sector and aggressive revenue growth that fueled an explosion in stock price appreciation, before the subsequent drop after the bubble burst in April 2000. While Cisco's stock has yet to reach dot-com era price levels, for the past two decades Cisco has shown signs of growth, while maintaining very healthy financials. In this analysis, after a quick look into the company's fundamentals, an intrinsic value calculation will be presented in an effort to reach a fair value estimation for Cisco's stock.


Cisco offers a wide range of technology products and services, that revolve around networking, security, collaboration, applications and cloud services. The company operates globally in three geographic segments: Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific. Cisco groups its products into the following categories: Infrastructure Platforms, Applications, Security and Other Products.

Source: 2020 Annual Report

As the company shifts towards more participation in the software industry, Cisco achieved the target of generating 50% of revenue from software and services in the fiscal year 2020. For reference in 2017, the company only generated 29% of total revenue from software and services. Net and gross margins also stand at satisfying levels and are expected to increase as Cisco brings in more and more revenue from software, an industry famous for its huge profitability potential. Cisco also maintains reasonable debt levels, with a Debt/Total Assets ratio of 16% and a current ratio of 1.72. A big reason for that is the considerable amount of cash and cash equivalents that appear on Cisco's balance sheet, which the company has been using consistently over the past decade to reduce debt and perform large-scale stock buybacks.

Source: Annual Report Summary

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This article was written by

Alex Galanis profile picture
Financial Analyst, interested in U.S equities, examining Growth, Dividend Growth and Value Investment opportunities, as well as ETFs.  Accounting and Finance Graduate. CFA level ΙI candidate.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (39)

Zucks profile picture
The problem with calculating a cash flow is estimating hardware sales which means estimating when customers will determine how to use 5G and at last start buying equipment... or not. Cisco has discussed this before.Having purchased at $25 a long time ago I can afford to hold on and see how the winds blow. Intuitively, either assumption will effect cash flow, though the timing.. next year, three years from now, will also have an effect. Happy forecasting.
Cisco is cash rich and Mgt Poor! Missed every market opportunity, buys software companies and to date has screwed everyone of them up. Bottom line numbers improve by buying back stock and laying off 7 to 10 thousand per year. Employees hate Robbins and have no company loyalty. In fact they fight for the yearly packages!
Mark Tennenbaum profile picture
With all due respect, using an average 5 year beta is putting a lot of value leverage on a small number that is almost certainly incorrect.

Cisco has changed a lot in 5 years as has the market. To employ htat average of change on the next series of years misses what is happening inside Cisco and the world around it.

I would think looking at peers for cash flow multiple comparisons with adjustments is a more accurate than, or at least needed support for, any DCF valuation.
16178052 profile picture
Cisco is going through strategic changes. But company is cash cow, a benefit most companies dont have.
Cisco is in the third stage of their economic life cycle.
First stage infancy..no profits...
Second stage intense growth..profits...no dividends
Third stage slow growth..cash cow....dividends..
Fourth stage decline...
The thing about cisco is that their not innovating. Point in case, they have webex, but lost to zoom as they didn't change and adapt to video conferencing. Not a very good long term investment in my opinion.
They didn't "lose" to Zoom. The conferencing technology was developed at Cisco and then taken when Eric Yuan left Cisco to start Zoom. Cisco should be in court with Zoom as we speak as they should own all the rights to it. Why they're not is beond me.
mkep profile picture
07 Mar. 2021
It's boring. That's what I like about it.
mkep profile picture
07 Mar. 2021
@mkep - plus I like Meraki's market position in the new 5G SD-WAN market
Your 10 year risk free rate is considerably below the rate of expected inflation.
Rates of 2.5% or 3% are far more realistic.
Using those rates would result in far lower valuations
CSCO had the opportunity of lifetime during pandemic to make tweaks and adjust. That ship has sailed. Moreover when I read about founder of Zoom came from CSCO WebEx, but CSCO too slow to adapt- so he left to start Zoom — that’s not the kinda company I want any part of. CSCO is at best a Harvard business case study for new MBA studs to learn from. Amazes me how many people hold and hope only to be disappointed after every earnings release.
@keeneye Eric Yuan left CSCO in 2011, to found Zoom, long before the pandemic.
@Al F Got it, but the reason he left is my point.
Puche profile picture
Thanks for the very thorough analysis. I would like to point out a few things:

- IMO using 5 years of CFs for a company like CSCO is way too little
- your comment “The perpetual growth rate of 1.5% that was selected is a very modest and realistic estimate in my view” feels like a throwaway comment yet 80% or more of your valuation is tied to the terminal value. 
- to use 1.5% without substantive support or quantitative analysis justifying the rate IMO makes your analysis very weak.
- change the rate to say 2.5% or .5% and tell the SA community the valuation. You’ll see the majority of the valuation is tied to that simple throwaway perpetual growth rate.

I could go ob but strong finance and valuation investors know exactly what I’m talking about.

Of course this is just my two cents. Slow and steady! Good luck to all!
CSCO has been one of my five dividend stocks in my long term portfolio. This company has a fairly measured evaluation, and has a boat load of cash for future acquisitions. Don’t count CSCO out. Trade King
CSCO has done very little in the last 3+ years. They were ar 41 in January 2018 and today they are slightly higher than a 10% gain. So in the last three year their increase is averaging 2-3% per year. Given the growth in tech for the last three years this is very poor. The only way I make money on Cisco is selling options as they have not turn the corner. I am not a believer in CSCO.
@DavidJL615 Wasn't Cisco at $57 just 3 years ago? So they are now down 20%.
@Harleythor they were at $32 one year ago and now $52, what's your point? LOL.
@DavidJL615 you need to add on the 9% div over the 3 years period. Many tech companies pay no div...
“As shown a Fair price for Lululemon” think you meant Cisco?
Alex Galanis profile picture
@filmmakerpete Yes I apologize, already submitted a correction.
As shown, a Fair Price for Lululemon's shares was calculated at $51.46, after adjusting for Net debt, using mostly conservative, consensus estimates that match the company's guidance. Given the current stock price of 44.56, as of the time this article is written, Cisco appears to be trading at a discounted compared to the fair value calculated. Plugged from Luluemons article in February ????
@mikemgb ha ... saw that too.
Alex Galanis profile picture
@mikemgb Already submitted a correction, I apologize.
@Alex Galanis 👍🏼 At least you know I read both articles!!
Thanks for your effort, indeed conservative assumptions and good depiction of the decent value- growth proposition Cisco still offers where many talk about crazy valuations in the market. Your calculation has a very low terminal growth number, realistic debt and market risk premia even with risk of further rising bond yields down the road
Alex Galanis profile picture
@schulien Thank you for your feedback.
I'm not denying that CSCO may be a compelling investment, I have a significant position in the shares. My concern is the company could just as easily be the 2020s version of IBM. Recent 2%-3% dividend increase did not strengthen my confidence.
christinespeaks profile picture
@Jeffrey888 Ouch! Me2
@Jeffrey888 Me three.
My question for anyone who knows since Cisco hit its $75 high 20 years ago, how much cash has it spent in Buybacks?
I am asking since it still is 20% below its nearest high of $57 and in the past 2 years
has only given a 1 penny per year increase in the divvy.
How much $$$ has gone into Buybacks. I don't think it worked out well for shareholders. Do you think Buybacks have helped the stock price or just paid for
the employee stock purchase plan.
@Jeffrey888 Your concern is real. It is exactly that - 2020 IBM. This company needs serious change of leadership.
abdulmoiz1254 profile picture
Ludo5312 profile picture
I think your last line is spot on! However, the dividend supported by very healthy and growing EPS and 'safe' cash flow is certainly worth taking into consideration. Probably little downside and $40 may be in the wishful thinking zone.
fortbrepoels profile picture
@Ludo5312 the stock price is 46.25$ for the moment !
csco is a buy for the moment :)
Ludo5312 profile picture
@fortbrepoels Thank you! Did you read the article? The last paragraph may give a hint as to my statement.
Alex Galanis profile picture
@Ludo5312 Thanks for the feedback. Much appreciated.
Vandooman profile picture
Thanks. Useful information.
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