Cisco's stock trades at about 17 times forward earnings on a price-to-earnings multiple basis. Mostly pure play software names Google, Microsoft and Salesforce trade at an average of 45 times.
That valuation gap deserves to close — Cisco (CSCO) argued in a closely watched investor day on Wednesday afternoon —as it no longer is just reliant on low margin routers and switches to make its quarterly numbers.
Instead, Cisco contends it's one of the largest software players in the game nowadays, positioned in key growth markets such as hybrid work and public cloud that offer up margin rich recurring revenue streams. Amid the focus on software, the company said its total addressable market is poised to grow to $900 billion over the next four fiscal years, compared to $260 billion currently.
"What we tried to do yesterday was basically remind Wall Street of what we told them in 2017, that we actually delivered on our execution," Cisco Chairman and CEO Chuck Robbins said on Yahoo Finance Live.
Wall Street reacted mixed to the presentation. Shares of Cisco fell slightly in Thursday trading.
The Street appeared to focus in on Cisco's longer-term outlook.
Cisco outlined 5% to 7% sales growth over the next four fiscal years. Earnings per share are seen growing by a similar amount. The Street was looking for about 9% earnings growth, likely assuming a bigger margin bump from the shift to selling more software.
Said Robbins on the disappointing profit outlook, "For some period into the future, we are experiencing higher costs in our supply chain so our gross margins are a little pressured by the cost of goods sold increases that we see right now. And that's going to be with us for a period of time. We thought it was prudent from both an investment area and some of the pressure we see in the supply chain, to make sure that we guided appropriately and that is what led us to the 5% to 7% [growth]. We would expect over time as the supply chain improves and obviously software is a bigger percentage of our revenue, we would expect that to get better."