Is Cisco Systems (CSCO) a Hidden Gem in NASDAQ's Value Landscape?

In early 2025, Cisco Systems (NASDAQ:CSCO) emerged as a focal point for hedge funds seeking stable, dividend-friendly stocks for long-term portfolios. With 84 hedge funds holding positions and ranking 5th on Insider Monkey’s "Best Retirement Stocks" list, Cisco’s valuation and growth prospects have sparked debate: Is this networking giant undervalued, or does its premium pricing signal overvaluation? Let’s dissect the data.

Hedge Fund Sentiment: Stability and Dividends Attract Institutional Buyers

Hedge funds favor Cisco for its low beta (0.79) and 2.56% dividend yield, which align with their risk-averse retirement portfolio strategies. The company’s Q1 2025 results reinforced this appeal:
- Revenue hit $13.8 billion, exceeding estimates by $70.5 million.
- Net income rose to $2.7 billion, with non-GAAP EPS of $0.91, a 20-year high.
- AI-driven orders surged, including $300 million from web-scale customers, while security revenues doubled year-over-year.

Analysts like Rosenblatt Securities upgraded CSCO to "Buy" with a $80 price target, citing "triple-digit growth in web-scale orders" and strong recurring revenue streams.

Valuation Metrics: A Mixed Picture

Cisco’s valuation metrics reveal both opportunities and cautions:

EV/EBITDA: Premium Pricing vs. Peers

• As of April 2025, Cisco’s EV/EBITDA was 15.77, exceeding the hardware industry median of 10.81.
• Historically, this ratio has fluctuated between 5.31 (2013) and 18.75 (2024). The current level suggests the market prices Cisco at a 62.21% premium relative to peers.

P/E Ratio: Growth vs. Value

• Cisco’s P/E (TTM) was 24.08, slightly above its 10-year average of 20.5, but lower than high-growth tech peers.
• Its EV-to-Revenue (4.25) and EV-to-Free Cash Flow (17.99) remain reasonable compared to industry averages.

Dividend and Cash Flow Strength

• Dividend yield of 2.56% and $3.6 billion returned to shareholders (via buybacks and dividends) in Q1 alone underscore financial discipline.
• Free cash flow (FCF) of $12.8 billion (TTM) provides a solid buffer against macroeconomic headwinds.

Growth Drivers: AI, Cybersecurity, and Recurring Revenue

Cisco’s valuation premium is justified by its strategic bets on high-margin, recurring revenue segments:
1. AI Infrastructure:
- $1 billion+ AI order target for FY2025, fueled by Silicon One-based switches and AI-native products like Hyperfabric and AI servers.
- Web-scale orders grew triple-digit YoY, while security revenues doubled, driven by XDR, Secure Access, and Splunk integration.

1. Subscription Model Dominance:

2. 57% of revenue now from subscriptions, with ARR hitting $29.9 billion (+22% YoY). This recurring revenue reduces volatility and attracts long-term investors.

3. Market Leadership:

4. $54.2 billion in TTM revenue and 69.3% gross margins (a 20-year high) reflect operational efficiency.
5. Cisco holds ~40% share in enterprise networking hardware, with Splunk’s observability tools boosting cybersecurity solutions.

Risks and Considerations

• Valuation Risk: Competitors like Arista Networks (ANET) or AI-focused stocks (e.g., NVIDIA) may offer higher growth rates, pressuring Cisco’s multiples.
• Macroeconomic Uncertainty: IT spending cuts could impact enterprise orders, though Cisco’s recurring revenue reduces this risk.

Conclusion: A Balanced Buy for Long-Term Investors

Cisco Systems is not a "cheap" stock by traditional metrics—its EV/EBITDA and P/E ratios exceed industry peers. However, its dividend yield, recurring revenue growth, and AI-driven tailwinds justify its premium. Key data points:
- EV/EBITDA of 15.77 is offset by $12.8B FCF and 22% YoY ARR growth.
- Hedge fund support (84 funds holding stakes) and analyst upgrades (e.g., Rosenblatt’s $80 target) signal confidence in its defensive profile.

For investors seeking stability and income, CSCO remains a compelling buy, especially if AI adoption continues to drive networking and security demand. While not the cheapest stock, it offers a rare blend of value, dividends, and growth in an increasingly volatile tech landscape.

Investors should monitor AI order growth and Splunk integration progress to validate Cisco’s premium valuation. For retirement portfolios, CSCO’s low beta and high ARR make it a safer bet than pure-play AI stocks, despite its current valuation.

Data as of April 22, 2025. Past performance does not guarantee future results.