The dotcom bubble’s most valuable stock is now a sensible value pick

Questor: Cisco offers a rare opportunity as AI ventures are not baked into the share price

Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
It’s a Nasdaq-listed technology stock, so it must have a sky-high valuation and view dividends as something of an insult, right?
The eye-watering ratings of high-flying tech giants, with high, double-digit price-to-earnings ratios and dividend yields that range from zero to measly, clearly deters most value-oriented investors. Even after the recent market rout, Nvidia and Amazon respectively trade at over 50 and 40 times this year’s forecast earnings, for example.
But not all tech stocks are like this.
Take Cisco Systems, for example, a specialist in networking and security products, which makes both hardware and software. It became notorious during the dotcom boom as an example of valuation excess, but things have changed substantially since.
Shares in this Nasdaq stalwart have consistently traded on a multiple below 20 times forecast earnings for the past decade and its dividend yield has averaged around 3pc. It also returns large amounts of cash through buybacks, which has reduced its share count by more than a fifth over the decade.
Cisco shares are available through the UK’s main brokers but buyers need to fill out a W8-BEN form to minimise withholding tax on those juicy dividends.
What’s more, Cisco is very profitable, with operating margins of over 30pc – and last year’s $28bn (£20.94bn) takeover of cybersecurity and data analytics group Splunk should pep up recent lacklustre sales growth.
Its qualities have attracted some of the world’s most successful investors. A total of 26 top-flight equity managers own shares, each of them among the top 3pc of the 10,000 professional investors tracked by financial publisher Citywire.
Their belief in the company has resulted in it being awarded a top AAA rating from Citywire Elite Companies, which rates companies based on smart-money backing.
John Bailer, deputy head of equity income at Newton Investment Management, is one of these elite backers. He owns Cisco in several funds, including the BNY Mellon US Equity Income Fund.
Mr Bailer told Questor: “The value of Cisco’s stock is currently understated due to concerns about AI spending cannibalising hardware spending.
“However, we believe that these revenue growth concerns are largely cyclical in nature and that Cisco is well-positioned for an upcoming recovery in spending.”
In fact, rather than a threat, Bailer believes Cisco is positioned to make AI an opportunity.
“The company’s long-term growth potential is often underappreciated, with its strategic focus on AI and cybersecurity, as well as its recent acquisition of Splunk, which should significantly enhance its capabilities and market position.”
Cisco makes numerous products, ranging from network switches and routers to cloud-computing and data centres. In AI, its recent commitments include a $1bn dedicated investment fund and a tech collaboration with Nvidia. When it presented its full-year results in August, Cisco claimed to have received around $1bn in AI-related orders to date, with a further $1bn expected this financial year.
Critics argue that, in the current environment, these figures are small beer for a company with sales north of $50bn. On the flipside, and to Bailer’s point, that means future AI wins may not be sufficiently factored into the share price – a rarity in today’s market.
After a modest decline last year, Cisco is guiding a return to revenue growth. With its high margins, strong cash generation, steady growth and low debts, this column agrees with the 26 top managers betting Cisco’s attractions are not being fully appreciated.
Questor says: buy
Ticker: NYSE:CSCO
Share price: $53.02
Shares in US cosmetics upstart Elf Beauty have tanked since this column recommended them in March. They’re down by a grizzly 48pc.
Questor had been impressed by the company’s breakneck sales and earnings growth, as well as strong share-price momentum. But as is an ever-present danger with momentum plays, hopes have proved too high.
However, the company’s chief crime, which was not confirming some brokers’ loftier forecasts for future sales growth during its first quarter earnings call in August, does not look so grievous given overall guidance for the year was raised. Meanwhile, earnings-per-share is forecast to rise by 76pc in the three years to the end of March 2027.
Enthusiasm may have run ahead of itself, but Elf remains a strong growth story. As such, Questor thinks this stock is worth sticking with even after a fall that would normally signal time to run for the hills.
Questor say: hold
Ticker: ELF
Share price: $112.56
Miles Costello is a contributing journalist for Citywire Elite Companies.
In honour of Questor’s sixtieth birthday, we want to hear your stories of how The Telegraph’s tipster has helped you. Please send your stories of the biggest wins (or losses) you have enjoyed as a result of following Questor’s advice to: [email protected].