Concerns in the supply chain have turned this technology stock into a bargain

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Since supply chain problems plague the tech sector, no company emphasizes the problem more than that

Cisco systems
.

The stock fell more than 6% on Thursday after the company reported financial results that were dent of a number of component delays. And yet, it is difficult to find a business technology company with a more appealing long-term perspective.

Although there will be continued short-term noise for Cisco (ticker: CSCO), investors should jump on board now – sales over the past week have made a cheap stock even cheaper.

Cisco is experiencing increased demand across its customer base: Cloud computing providers are increasing their capital expenditures to meet the soaring demand, telecommunications companies are rolling out their 5G networks around the world, and enterprise information technology companies are accelerating their expenditures as the pandemic disappears.

In its first quarter quarter ended October 30, Cisco saw 33% order growth, accelerating from 31% in the July quarter, with a huge 200% growth in demand from “webscale” cloud providers and an increase of 60% from telecommunications companies. Cisco said it left the October quarter with the highest backlog in its history.

Investors were too focused on the supply chain issues to notice. While revenue of $ 12.9 billion had increased by 8% over total revenue the year before, it was at the low end of the company’s guidance range of 7.5% to 9.5% and around $ 100 million relative to to the Wall Street estimates. The company’s expectations for revenue for the January quarter speak of a growth of 4.5% to 6.5%. At the midpoint, that means revenue of $ 12.6 billion, about $ 300 million less than the old Wall Street consensus. Cisco sells everything it can, but demand has dramatically exceeded their ability to meet customer needs.

Two months ago, I wrote a bullish column about Cisco, prior to its first meeting with analysts in four years. I noticed that the results for the July quarter had been better than expected, due to some of the factors mentioned above, including strong demand from cloud providers.

At the long-awaited analyst meeting, Cisco said it expected annual growth in profits and revenue of 5% to 7% until 2025, driven by a growing portfolio of subscription-based businesses. And in the past week, Cisco reiterated its projection for growth in the same area for the July 2022 fiscal year, suggesting acceleration in the second half of the fiscal year.

But right now, supply chain problems are creating more problems for the company. First, Cisco cannot get enough semiconductors, power supplies, and other key components to meet its needs. Production capacity is also an issue for Cisco, which does not make any own production.

Cisco is providing financial support to contract manufacturing partners to expand capacity, and it is adding more vendors to address a severe shortage of finished goods, but the bigger problem remains.

Cisco Chief Financial Officer Scott Herren says the company “works night and day” to address component deficiencies.

It adds new expenses in the short term. To get spare parts faster, Cisco pays surcharges for expedited delivery of some components. The Lord says air, sea, and truck transportation routes all remain “twisted.”

Cisco has raised the prices of many products to offset the higher costs, but it will take time for the increases to flow through to the income statement, and the pressure on margins will at least remain in the next few quarters.

JP Morgan analyst Samik Chatterjee wrote last week that Cisco’s recent findings are “evidence of the strong demand environment.” He admits that supply constraints have worsened since the company reported results for the July quarter, but he considers the headwind to be temporary, with the company’s accelerating orders “more reflecting the underlying accumulated demand for network and IT infrastructure upgrades.”

Chatterjee has an overweight rating on Cisco shares and a price target of $ 70, about 30% over a recent close of $ 53.63.

Cisco is hardly the only technology company dealing with shortages. As I wrote last month, supply chain problems have hurt recent quarterly results at a number of hardware companies, including

Apple

(AAPL), which said the problem will get even worse in the December quarter.

Supply chain issues will be a major topic of conversation in upcoming earnings calls from PC manufacturers

Dell technologies

(DELL) and

HP Inc.
.

(HPQ). They are both scheduled to report results after the stock market closes on Tuesday.

The key question for investors in hardware stocks is whether orders are delayed – or destroyed. For some consumer goods, a shortage during the Christmas shopping season can result in gift givers simply buying something else – your loved ones may have to settle for a sweater over a laptop. But when it comes to IT infrastructure, Cisco’s rivals face the same challenges; all are restricted. No one is better off.

Cisco CEO Chuck Robbins told me that so far he sees no sign of lost orders. “At some point, you lose something to someone who can deliver faster,” he said, while quickly adding that “we also get our share the other way around.”

Robbins noted that some competitors have postponed shipments to existing customers in order to deliver new ones. But he also said Cisco’s cancellation rates are running below historical standards. In short, most of Cisco’s customers will simply wait. Investors should do the same.

Write to Eric J. Savitz at eric.savitz@barrons.com