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CNBC
4 days ago
- Business
- CNBC
Cisco Systems deserves more respect in AI, and its quarterly results prove it
Cisco Systems on Wednesday evening beat Street estimates on both the top and bottom line with its fiscal 2025 fourth quarter results. The company also issued slightly better than expected guidance, driven by strong growth for its networking products. Revenue in the quarter ended July 26 increased 8% year over year to $14.67 billion, exceeding the LSEG-complied analyst consensus estimate of $14.62 billion. Non-GAAP earnings per share (EPS) increased 14% on an annual basis to 99 cents, beating expectations of 98 cents, LSEG data showed. GAAP stands for generally accepted accounting principles. CSCO 1Y mountain Cisco Systems 1 year Cisco stock, which is also one of the 30 names that make up the Dow Jones Industrial Average , dipped slightly in what was a choppy after-hours trading session. Shares closed at a 52-week high of $71.79 each last Friday and traded a couple of dollars below that level Wednesday night. Bottom line Overall, it was a pretty solid quarter for Cisco. The computer networking equipment and security company reported another quarter of huge order growth thanks to artificial intelligence infrastructure spending and an enterprise networking refresh cycle. When we review Cisco, we always focus on orders because that's the best leading indicator of where revenue is headed. It's always been an order story, and we liked what we saw in the fiscal fourth quarter. However, it wasn't all clean. Sure, the security segment had positive order growth as well, but it reported a big revenue miss that will raise some flags. Still, what matters to us is that Cisco has turned into a misunderstood AI play. The company is taking in billions of dollars of orders from webscale, also known as hyperscaler, customers, and big opportunities are ahead from big corporations and sovereign AI — countries expanding their capabilities and infrastructure. Hyperscalers are the household big tech names like Amazon , Meta Platforms , and Microsoft . In a market that rewards AI-exposed companies with lofty valuations, Cisco trades at a very reasonable high teens price-to-earnings multiple. That valuation is too cheap to us. Why we own it Cisco Systems is an enterprise networking equipment provider that has made big strides to appeal to webscale customers and bring in over $1 billion in AI infrastructure orders. The company has also increased its presence in the security market through its acquisition of Splunk. In addition, Cisco's long-term transition toward subscription software sales, which are sticky and come with higher margins, should help improve the stock's undemanding price-to-earnings multiple. Competitors : Arista Networks , Hewlett Packard Enterprise , Juniper Networks Most recent buy : July 28, 2025 Initiated : July 17, 2025 Some analysts believe Cisco won't get full credit for its AI business until the company breaks out when these orders will turn into revenue. During the earnings call, management explained it recognized roughly $1 billion of AI revenue from webscale customers during fiscal year 2025. We'll see if that added information helps the stock earn more credit in the weeks ahead. We are reiterating our buy-equivalent 1 rating and keeping our $78 price target for now. We initiated Cisco on July 17 and made two subsequent buys over the next two weeks. Commentary Total Product orders increased 7% in fiscal Q4 year over year with growth across all geographies, with segment revenue up 10% to $10.89 billion. Starting off with Networking , product orders increased by a double-digit rate, representing the fourth consecutive quarter of such growth. A big reason behind this order surge is Cisco's fast growing AI infrastructure business and its ability to capture share from webscale customers. The momentum in this business continued in the fiscal fourth quarter with orders exceeding $800 million, bringing the fiscal year 2025 total to over $2 billion. That's double management's original target for the year. During the earnings call, CEO Chuck Robbins pointed out that orders from four out of the top six webscale customers, each grew orders in the triple digits. Even better, two of those customers each placed total orders of over $1 billion across Cisco's four business segments in the fiscal year. One reason why Cisco has made huge strides in its AI efforts is due to a major partnership with Nvidia . The two companies have teamed up to integrate Cisco's Nexus switches with Nvidia's Spectrum-X architecture to provide what the company describes as low latency, high speed networking for AI clusters. Cisco has also integrated a security solution for AI factories. Beyond Nvidia, Robbins said Cisco has a close relationship Advanced Micro Devices and is working with AMD on some sovereign AI deals, including the one with Humain, a newly launched Saudi Arabian AI company. Cisco is also receiving orders from neocloud providers. CoreWeave , which rents out Nvidia chips to customers for AI workloads, is an example of a neocloud. Robbins said there were several large deals in the quarter from these neoclouds that were not mentioned in the disclosed webscale AI infrastructure order figure. In addition to the webscale networking order growth story, there's a strong refresh cycle happening from enterprise customers adopting the company's Catalyst 9000 switches as well as routers, wireless access points, and industrial internet-of-things, or IoT, devices. While it's still early, Robbins pointed out that enterprise AI orders are starting to ramp up and the company is growing a customer pipeline "in the hundreds of millions." By division, Networking revenue increased 12% to $7.63 billion, by far Cisco's biggest, and management called out growth across most of its portfolio. They saw double-digit growth in internet infrastructure and enterprise routing and good growth in switching. Server revenue, however, declined. The Security division, product orders increased by mid-single digits. Still, we were disappointed by the significant revenue miss, even with 9% year-over-year increase. Cisco boosted its solutions in this industry last year when it paid $28 billion to acquire Splunk, so we would have preferred to see more strength. However, Robbins is very upbeat about the future. He explained on the earnings call how orders for the newer, refreshed products within Security increased by above 20%. The weakness mostly came from its U.S. federal government business, which has been hurt by budget cuts. When backing out the federal business, the rest of world security order growth increased by double digits in the fourth quarter. Cisco has about two-thirds of its security portfolio growing above 20%, which gives management confidence in its ability to hit its long-term target of 15% to 17% growth from its Security and Observability business. Observabilit y and Collaboration grew slightly in fiscal Q4 but missed estimates. Services revenue was flat at $3.79 billion, which missed estimates. Lastly, we always appreciate Cisco's consistent approach to returning cash to shareholders. The company bought back $1.3 billion worth of stock in the quarter at an average price of $64.65. It has $14.2 billion remaining under its authorization. Guidance Cisco expects fiscal 2026 first quarter revenue of $14.65 billion to $14.85 billion. The midpoint of $14.75 billion is a beat against the consensus of $14.62 billion. It also sees non-GAAP EPS of 97 to 99 cents. The midpoint of 98 cents is a penny higher than the consensus. For the full-year 2026, Cisco expects revenue of $59 billion to $60 billion. The midpoint of $59.5 billion is a slight beat against the consensus of $59.4 billion. It sees non-GAAP EPS of $4 to $4.06. The midpoint of $4.03 is a penny higher than estimates. (Jim Cramer's Charitable Trust is long CSCO, AMZN, META, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
CNBC
08-08-2025
- Business
- CNBC
Texas Roadhouse's mixed results capture the conundrum this stock has become
Texas Roadhouse on Thursday evening reported mixed second-quarter results as elevated beef prices weighed on profitability. Still, the company posted strong comparable sales and said the ongoing third quarter was off to a great start, offsetting some fears around higher input prices. Revenue in the quarter ended July 1 increased 12.8% year over year to $1.51 billion, exceeding the LSEG-complied Wall Street consensus estimate of $1.50 billion. Earnings per share (EPS) increased 4% on an annual basis to $1.86, missing expectations of $1.91, LSEG data showed. Shares were down a little more than 1% in extended trading Thursday. The stock has been drifting lower this summer, closing the regular session down 7.4% from its late May high of the year. Bottom line Texas Roadhouse is executing on what it can control – creating an enjoyable environment and offering full menus at affordable prices – and it's showing within the results. When the restaurant chain reported Q1 results in early May, management said same-store sales growth for the second quarter were tracking at 5%. This is key restaurant industry metric is also called comparable sales, or comps. We were pleased to see that the 5% growth rate not only sustained through the quarter, but improved a little further. What a difference the weather can make. By month, comparable sales, a key restaurant industry metric, increased 4.3% in April, 7.2% in May, and 5.8% in June. Companywide, same-store sales increased 5.8% in the quarter, mostly driven by an increase in customer traffic — a good sign. This result beat the consensus of 5.3%, according to FactSet. Even better, these positive trends continued early into the third quarter, with comparable sales up 5.3% through the first five weeks, beating the consensus estimate of about 5%. This strong rate includes a negative 60 basis point pressure from the calendar shift of the Fourth of July. Texas Roadhouse Why we own it: Texas Roadhouse is a fast-casual steak chain that offers quality food at an affordable price in a fun atmosphere, creating one of the more compelling value propositions for consumers in the full-service dining category. A substantial majority company's stores are company-owned stores, with only a small proportion as franchise locations. Competitors: Darden (Olive Garden, LongHorn Steakhouse), Brinker (Chili's and Maggiano's), Bloomin' Brands (Outback, Carrabbas Italian Grill, BonefishGrill) Portfolio weighting: 2.3% Most recent buy: April 9, 2025 Initiated: Feb. 4, 2025 Usually, strong traffic and comparable sales performance translate to operating leverage, margin expansion, and earnings per share growth. But out of the company's control is beef inflation. This headwind weighed on the second-quarter results and is expected to be even worse in the third quarter. The company has some counterbalances in its disposal, including raising menu prices and labor inflation is coming in a little bit better than expected. On the call, CEO Jerry Morgan said the company plans to raise prices by 1.7% at the beginning of the fourth quarter. "We feel confident this is the right level of pricing to maintain our everyday value while offsetting some of the inflationary pressures we are facing," he said. We are once again torn on Texas Roadhouse. The continued traffic-driven comps are proof that the brand is loved and the concept works wherever they open up a new location – and the company is doing plenty of it. The consumer may get more "picky" and "choosy" in the back half of the year, but Texas Roadhouse is a sensible place to flock to get great bang for one's buck. However, beef prices are everything for this steakhouse chain, and even with the strong comps, we probably won't see the big stock breakout we've been waiting for until prices fall. Tight cattle supplies in the U.S. have driven beef costs up in recent years. On Thursday, cattle futures traded on the Chicago Mercantile Exchange hit another record high. That's our current view. We remain optimistic about the future, supported by strong traffic trends, ongoing franchise acquisitions, and growth from new store openings. However, commodity pressures remain a headwind, which is why we're maintaining our hold-equivalent 2 rating and refraining from buying the stock until we see a more attractive entry point. Commentary The better than expected comparable sales growth of 5.8% was driven by a 4% increase in traffic and a 1.8% increase in the average check. Management spent some time on the earnings call walking through some of the mix dynamics— an industry term for the items sold — impacting check levels. The alcohol category continues to be a drag, a sign that people are drinking less when they are dining out. This is a society-wide trend. Introducing nonalcoholic cocktails, often called mocktails, to the menu has been one way the company has addressed the weakness in alcohol. On the entree side, management called out guests trading up to either bigger steaks or ordering steak more often as opposed to other dishes like chicken. During the quarter, Texas Roadhouse opened four-company owned restaurants, including two Bubba's 33 locations, and one franchise restaurant. Management said it's on track to open approximately 30 company-owned restaurants this year and could do a little more than that next year due to plans to step up growth for Bubba's 33, its sports-bar chain with 52 locations currently. Additionally, Texas Roadhouse completed the acquisition of three franchise restaurants, bringing its year-to-date total to 17. Texas Roadhouse said it has plans in place to acquire eight domestic franchise restaurants in the coming quarters, including its five remaining franchised locations in California. The company buys back these franchised locations from time to time, and we generally think these are a good use of cash. Bringing franchised locations under the corporate umbrella gives the company more control over everything in its restaurants and typically leads to stronger operating results. As for cash returns to shareholders, the company bought back $9.8 million worth of stock in the quarter. That's a step down from the $50.2 million worth of shares repurchased in the first quarter. Guidance As mentioned earlier, Texas Roadhouse comparable sales at company-owned restaurants increased 5.3% year over year through the first five weeks of the third quarter. For 2025, management reaffirmed most of its outlook. It continues to expect positive comp sales growth, including the benefit of menu price actions. It also continues to expect capital expenditures totaling $400 million and so-called store week growth of 5% Store week growth is a way to measure both new store openings and franchise acquisitions. However, the company now expects commodity cost inflation to be approximately 5%, which is up from last quarter's view of 4%. This is obviously disappointing to see but it's not a complete surprise since beef prices are on the rise. Partially offsetting the worsening commodity costs is a better view on wage and labor inflation. Management now sees that increasing 4%, which is the low end of its previous guidance range of 4% to 5%. Management also lowered its expected effective income tax rate to 15% from a range of 15% to 16%. (Jim Cramer's Charitable Trust is long TXRH. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
