Chapter 1: What is the main topic discussed in this episode?
We're talking earnings and investor questions on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime contributors, Matt Frankel and John Quast.
So today we're getting lots of questions from members, and we thought this would be a really good time to combine some listener questions as well as earnings reports that we've seen coming out in the past couple of days as a little bit of a marriage of good ideas.
And so we're going to talk about Cisco's earnings, we're going to talk about Lumentum's earnings, and also we'll get into, hey, maybe we should talk about non-AI things for a little bit from our investor mailbag. But as I said, we're going to start with Cisco. And we got a question a little while ago from one of our listeners, I hope I get the name right, Ahilish Shankar.
And was asking about Cisco and what are our thoughts on it. And I thought it would be a great time to start the conversation today because Cisco reported earnings and the stock is up 13.8% as we were recording because numbers were pretty good. Revenue growth was up about 12% for the year earnings was up and obviously guidance was looking pretty good.
John, why don't you run us through the numbers and what you guys saw in this particular earnings that I would say defied expectations of what Cisco has been for a while?
Yeah, it's so surprising to be talking about Cisco, one of the poster children of the dot-com bubble over 20 years ago, but really the business is booming unlike ever before. You look at the most recent quarter, 12% top-line growth. Really, all of the growth is coming from one part of the business.
Cisco has various components, but there's one part of the business that's driving everything, and that is networking. So the company reported 25% year-over-year growth in the networking side of the business. Everything else is either down or basically flat.
Essentially what is happening here, as the AI infrastructure build out marches on, all of these GPUs, the clusters, even the data centers themselves need to be connected. And this really plays to Cisco's strengths. It's getting a ton of demand. in particular from the hyperscaler businesses. And so you think of the public cloud giants, the tech giants, the magnificent seven.
These are the companies that are needing network solutions, such as the ones that Cisco provides. And what is fascinating here, when you look at the orders to the hyperscalers last fiscal year, about 2 billion total for Cisco. Going into this fiscal year, it was expecting 5 billion total. And so that was quite ambitious of a projection, more than doubling year over year.
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Chapter 2: What are the key highlights of Cisco's recent earnings report?
And just to kind of put this in perspective, John correctly mentioned that now Cisco expects $9 billion in orders this fiscal year for AI infrastructure. And that's compared to just $4 billion, just $4 billion in expected recognized AI revenue. So more than double what they're recognizing in AI infrastructure revenue, they're expecting for future revenue because they're getting these orders in.
So this is really just a long way to say that the reaction to Cisco's quarter isn't necessarily about revenue. No one's that excited about 12% year over year top line growth or the earnings that they just reported on a per share basis. It's as much about the orders it now has on its books that will be recognized in the future periods and the anticipated acceleration in that number over time.
Getting back to the question that our listener
Ahilish asked related to is like, is this a good idea? And this is one of the things I've been struggling with with Cisco. And we'll get into it with when we talk about Lumentum in the next section as well, is that these are businesses that have been notoriously cyclical for pretty much all of their life as well. Publicly traded companies.
I mean, Cisco, like to John's point, was the poster child of, you know, massive build out during the dot com boom of everybody had to have Cisco systems equipment. And then everyone was like, well, maybe we don't. Maybe we can use other stuff. And it was OK. You know, it took like decades for investors to see the highs of Cisco stock again.
Looking back over the past 10 years, revenue has kind of been up and down. Operating cash flow for this company is more or less what it was 10 years ago. And so this is where it's been a little bit of a struggle for me. The company is doing much, much better right now. But is this just a shorter term catalyst of a typically cyclical business?
Or is this something that's fundamentally different about the business and we as investors should look at it? differently.
Yeah, I mean, well, Cisco is at an all-time high after this earnings report. It's nearly doubled over the past year. The AI business has nearly doubled their expectations as well. So I would argue that not only is it a move that's justified, but this is kind of a fundamentally different time. This isn't just cyclicality right now.
I don't think we've seen an AI cycle over the past couple of decades. This is something that's new. It's something that wasn't really a big market opportunity. No one was talking about AI infrastructure a few years ago. So shares trade for about 26 times forward earnings right now. There's a solid case to be made that revenue growth will accelerate in the 2027 fiscal year, which starts very soon.
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Chapter 3: How does Cisco's networking segment contribute to its growth?
And I think I need to agree with Matt here that there may be a case for owning Cisco stock here at this price. Listen, it's still quite the value compared to some of its competitors in the space. Growth is accelerating. We look at the... next quarter's projections, projecting 19% growth up from what was it, 12 to 13 this quarter. So that's an acceleration. That's a good thing.
Operating margin recently went from 23% to 25%. That's a good thing. And you look at what Cisco's products it provides, it does seem like they are starting to take some market share here. And if that continues, I don't think this is a terrible stock today. I think that I would still prefer Arista Networks. So that's A-N-E-T for its debt-free balance sheet.
I like nice, clean balance sheets, especially in the face of uncertainty. Cisco's isn't as clean as that. But I don't think it's crazy to own Cisco stock here.
Hearing both your response and thinking about it myself, I've always kind of looked at it in the same sense of these are all, how bullish are you on AI build-out? And you can look at the rates of spending and all the studies that are going out related to this.
And if you are a wholesale believer in what is being published and what is being projected for AI spending, then absolutely, these are four, five, six-year catalysts that are going to be hard to avoid as investors. It all comes down to how much you believe it.
We've discussed it many times here before, and I feel bad like a broken record saying it all over again, but it really does come down to how much of a believer in this AI infrastructure build-out you are. Coming up next, we're going to even talk more about this with earnings related to Lumentum.
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Similar to the stock move that we saw with Cisco earlier today, shares of Lumentum were up as high as 21% on recent earnings reports. This is a company that we got a question about from one of our listeners, Nathan Holstein. It's also a prominent member of several scorecards on the hidden gem side of various Motley Fool investing services.
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Chapter 4: What are the implications of Cisco's earnings for investors?
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For Matt, John, and myself, thanks for listening, and we'll chat again soon.