Summary

• Cisco's guidance out to Q2 2021 notes that Cisco will have a very easy comparison with fiscal 2020.
• For all the negative sentiment been priced in here, Cisco is over the worst now. And is a worthwhile investment opportunity.
• I declare that investors are getting a bargain opportunity and not asked to pay much for Cisco at less than 14x this year's EPS numbers.

Investment Thesis

Cisco (CSCO) has had a horrible 2020.

As the rest of the tech sector has rallied ahead and has been priced at crazy valuations, Cisco has not been a beneficiary, and its shares have hardly moved this year.

In fact, in a fully priced tech sector, Cisco is being traded in the absolute bargain basement as investors are asked to pay a paltry 14x forward earnings for the stock. I fail to see a rational argument for why Cisco is overpriced at this valuation.

Revenue Growth Rates Have Turned a Corner

After the horrible fiscal 2020 Cisco had, its guidance out to Q2 2021 looks rather enticing.

How has the share price reacted? It has hardly moved. But why? Because investors are totally disenchanted. Indeed, it's been a long time since Cisco was the poster child for a growth stock.

In today's modern world, Cisco is an old corporation, without the flare and passion of younger tech enterprise.

However, if we put our emotions aside and think through this logically, we should appreciate that as Cisco comes to lap its fiscal 2020 results which were negative high-single digits for the latter parts of fiscal 2020, this should make comparisons this year very easy.

Accordingly, already as we have guided for Q2 2021, even at the midpoint, Cisco is guiding for negative 1% y/y growth. However, as you can see below, over Cisco's past 3-years Cisco has not missed a single quarter.

Thus, we can reasonably assume that Cisco's Q2 2021 is very likely to reach 0% y/y growth rates. Making its valuation very attractive indeed.

Valuation - Very Cheaply Valued

To drive home the insanity of this market, a few months ago, in the October-November period the dinosaur Cisco was been valued with a similar market cap to Zoom (ZM). Yes, I know, Zoom is now a verb, etc.

However, just to give you an interesting reference point, Zoom's revenues over its trailing twelve months, were practically equal to Cisco's dividend over the first 90 days of its fiscal 2021 -- approximately $1.5 billion in both cases.

Cisco's capital return to shareholders remarked here doesn't even include its buyback. We are solely discussing its after-tax sum being returned to shareholders over a 90 day period.

On the other hand, I understand the frustration of its shareholders. Cisco is incredibly cash generative, and yet its share price appears to go nowhere. So let's go back to the first principles of investing: what's rule number 1? Don't lose money. If one invests into a period of maximum despondency and doesn't lose money, then, surely all other alternatives are favorable.

Assuming that Cisco's non-GAAP EPS comes out marginally better than it reported in fiscal 2020. Let's assume that Cisco's EPS increases by just 3% y/y, after improved operations and continuous buybacks.

This would take Cisco's non-GAAP EPS from $3.21 it reported for fiscal 2020, to $3.30 for fiscal 2021. At that point, this would imply that today's share price is being valued at less than 14x forward non-GAAP EPS.

As I look around the tech space, and I follow many companies so I should know, I fail to see many companies trading for less than 14x forward sales! For most companies, in today's stock market environment, where investors are often willing to ''believe'' first and see profitability later, investors are willing to pay shocking multiples.

In the case of Cisco, we are presented with the opposite situation. Mr. Market is so despondent here that investors aren't willing to get involved at even 14x forward earnings. By any measure, this high earnings yield is way better than investors are getting elsewhere in the S&P 500.

The Bottom Line

Cisco has fallen from grace and is pricing in too much negativity. Even if we factor in its poor growth rate, there's still a lot of potential for investors.

I know better than most investors, and I have the scars in my portfolio to prove it, that turnarounds seldom turn. But my contention here is not on a turnaround investment. I'm simply arguing that Cisco continues to operate in-line with what it has, without much growth and just a tiny bit of improvement to its bottom line EPS figures.

Ultimately, there's simply no way investors are being asked to overpay for Cisco.