Cisco Systems Stock Falls 10% after Q2 Earnings Report
Cisco Systems released their quarterly earnings and beat expectations but disappointed investors with their expenditures.
Quick overview
- Cisco Systems' stock fell 10.87% following their Q2 earnings report, despite a 9.7% increase in sales.
- The company's free cash flow decreased by 24% year-over-year due to substantial capital expenditures on AI infrastructure.
- Although Cisco beat earnings expectations with $1.04 per share and $15.349 billion in revenue, concerns over profitability have led to a decline in stock value.
- Morgan Stanley advises investors to wait before buying Cisco stock until the company can demonstrate stronger profitability.
On Thursday, Cisco Systems (CSCO) fell 10.87% after the company issued their Q2 earnings report that showed decent growth but substantial capital expenditure on AI.
Cisco Systems should have had a great week after showing off a 9.7% increase in sales, but their stock fell nearly 11% when the same period showed that their free cash flow was down 24% for the year. The company put much of that capital into AI infrastructure, and investors are worried about their profitability.
This has been a common theme for tech companies during this earnings season. Shareholders and analysts wring their hands over AI expenditures, and companies demonstrate that their revenue is up while they promise great things for their AI investments. Cisco Systems sharply ended a phenomenally bullish stock run this week as a result.
Should Investors Buy into the Cisco Systems Dip?
Cisco’s earnings per share was $1.04, and they earned $15.349 billion in revenue, managing to beat out expectations for the company. The company also experienced year-over-year growth of about 10%, and they are obviously beating earnings projections, but that is not enough in the current stock market climate.
After climbing 17.8% since January 21st, Cisco stock is now down in a big way and could have trouble making back those gains. The stock price hit an all-time high on Monday, but the writing was on the wall for the company by that point. The stock started to steadily decline dealing into the company’s second quarterly earnings report.
Even though Cisco shattered expectations with a strong performance, the market was closely watching their profits. Their capital expenditures are higher than expected, and that drastically cut into their profit margins. The stock fell 7% initially and then another 4% in the following hours. The problem was that in a single quarter, the company spent more for AI orders than they had in the entire previous year.
Cisco is trying to keep up with its competitors and to stay on the bleeding edge. In order to do that, they need to invest into rapidly changing AI architecture, but that costs tremendous amounts of money. The company upgraded its network pipes and expects that their expensive refresh will allow them to stay competitive so that they can support the latest AI models. Now, Morgan Stanely is recommending that investors wait on buying Cisco stock. The company needs to figure out how it will demonstrate strong profitability in the current quarter before their stock becomes worthwhile for risk averse investors.
Cisco announced price increases to combat profitability concerns. So far, that is not enough to turn the tide of negative sentiment that they are facing for investing heavily into AI and then having trouble turning a sizable profit for their shareholders.
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