Cisco Systems is not 'a true AI play': Analyst

Shares of Cisco Systems (CSCO) are rallying in after-hours trading on Wednesday after the company beat earnings expectations on both revenue and profit fronts, while also providing an upbeat outlook. Morningstar Equity Analyst William Kerwin joins Market Domination Overtime to discuss the company's performance and future prospects.

Kerwin characterizes Cisco Systems' earnings results as "generally positive," highlighting that the company's fiscal 2025 guidance suggests a return to growth, which he views as "positive." Addressing the recently announced job cuts, Kerwin says he's "not overly concerned with it," interpreting the move as a sign of the company's focus on profitability.

Regarding Cisco's AI initiatives, Kerwin believes the company is not "a true AI play." However, he anticipates "moderate success" for Cisco in AI networking infrastructure, though he cautions that this will likely be "a drop in the bucket compared to the rest of Cisco's business." Kerwin emphasizes that Cisco's strengths lie in "campus and on-premises networks" such as office buildings and campuses, particularly in Wi-Fi and other areas requiring "slower speeds."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Angel Smith

Video transcript

For more on Cisco's fourth quarter results.

Let's get to Morningstar Equity analyst.

Will Kirwin, will I just want to start with the broad takeaway from the report here.

What sort of stands out to you from this?

Absolutely.

Uh We saw the results in the report and the guidance is generally positive mostly in line with what we were expecting.

But the fourth quarter results came in just above the top ends of the guidance range.

Guidance was a little bit above our estimates for the first quarter.

So generally positive.

And then I think it's also important to note that the full fiscal year 2025 guidance implies a return to growth which we see as positive for Cisco.

And how about the um announcement of sort of more job cuts here shrinking the size of the company?

Um What do you make of that as we were talking about at the same time that the company's revenue forecast is above estimate.

So they're still growing and they're cutting their job.

The jobs here.

I think how you put it earlier is about how we see it.

We are not overly concerned with it.

It's really a focus for Cisco on profitability, which is one of the things that we like most about the company, we're not concerned about its competitive position.

And again, we like the return to revenue growth that's implied with guidance for the next year.

So, you know, a little bit of fat trimming, a little bit of cost cutting but nothing worrisome.

Well, a couple call outs of A I in the release here and I'm curious, just sort of looking across the coverage space, where does Cisco fit into the A I story?

And are they really kind of the true A I play here or are they still building up that part of the business?

And it's a little bit more?

Wait and see.

We don't think they're a true A I play.

We think they'll have moderate success in A I networking infrastructure.

So this is the equipment that goes into data centers supporting A I models.

We think it'll be a drop in the bucket essentially compared to the rest of Cisco's business.

And we don't expect them to have a particularly strong market there.

We think A I is gonna be reserved for higher speed networking leaders like an ERISA networks, even like an NVIDIA with their networking portfolio.

So I guess then where does Cisco sit at this point?

Um in, in that sort of tech universe and the networking universe?

What role, how should investors be thinking about the role that it plays?

Cisco continues to be dominant in what we call campus and on premises networks.

So these are slower speeds and office buildings and campuses wi fi things of that nature.

We don't see the company is particularly strong in faster speed, higher performance.

This is like cloud computing or A I what we were just talking about.

But for us that's OK, Cisco is dominant in its home markets, those campus networks that I just talked about and we think that's all you need to see to justify where our fair value estimate was coming into the earnings release today at $50 a share.

I mean, will how much does that limit future growth though?

Right?

When you think about future growth in the industry, I mean, you just said that they're not a leader in cloud or faster, move faster moving network systems or A I I mean, that seems like more of the hot trade.

When I think when I think about this space, does that sort of limit upside?

It definitely limits their growth.

You know, we see Cisco as a GDP, maybe GDP plus grower in the low to mid single digits over the long term.

And that reflects the growth of those campus and on premises markets.

So it's not the sexier high flying growth in the double digits that we see from firms that are well exposed to A I but it is still growth and we think concerns over Cisco's demise and and falling into a decline because it can't play into A I as overblown because we still see these home markets even as lower growth, still growth over the long term.

And again, the profitability that Cisco is able to generate from them is really strong.

Well, Ken, thank you so much.

Appreciate it.

Thank you.