We think the narrow-moat firm's transition to software is going well, but suggest a wider margin of safety before investing.
By Ilya Kundozerov | 08-16-17 | 10:30 PM | Email Article

 Cisco  finished its fiscal 2017 largely in the same way it started, by displaying an overall softness across its legacy hardware portfolio. This quarter saw another round of year-over-year declines in switching, routing, and data center segments, along with collaboration segment’s hardware. On the upside, Cisco posted another 50% yearly growth in software and subscription deferred revenue as the company continued to execute on its strategy to shift away from hardware business and deliver more value to the customers through software and services. DRAM pricing remained a major headwind for gross margin, which we expect to continue well into calendar 2018. Overall, we believe Cisco is navigating the transition to software relatively well, but there is more work to be done. With that, we are maintaining our $33 fair value estimate for narrow-moat Cisco. With the shares trading in 3-star range, we recommend potential investors seek a wider margin of safety before investing.

Ilya Kundozerov is an equity analyst for Morningstar.

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