Cisco Beats but Wall Street Misses

NEW YORK ( TheStreet) -- There's no denying that Wall Street has an insatiable appetite for growth. But to that end, I don't believe that there's anything a company can do other than to beat its performance expectations, which is exactly what Cisco ( CSCO) has now done for 10 consecutive quarters. But instant gratification is another flaw that plagues investors, many of whom missed, if not blatantly ignored, the good that came out of Cisco's earnings report; this sent the stock tumbling down 10%.

Earlier this week, I told you that Cisco was a buy ahead of earnings. And even with Wednesday's plunge, I'm not backing away from that. Here's why I was right: Cisco beat or reached the upper end of its guidance on pretty much every metric that mattered, including earnings of 52 cents per share on revenue of $12.4 billion.

On an adjusted basis, which removes a patent litigation settlement with TiVo ( TIVO) and other items such as stock compensation expense, the network giant posted a net income of $2.8 billion, up 12% year over year. This is while the Street was modeling for 8% growth. Revenue, meanwhile, was up 6% year over year. Some are calling it "in line", but based on some estimates, Cisco actually posted a slight beat -- albeit by $100,000. Not to mention the company generated $4 billion in cash flow.

I get that the margin story was not up to Cisco's usual standards, falling more than 1% year over year. But I wouldn't blow this out of proportion. In fact, the slight decline in margin was expected, especially since the company was facing shrinking corporate enterprise budgets. Do you recall what happened to Aruba Networks ( ARUN) in its May quarter? The stock was hit by "hurricane Cisco" -- falling almost 30% following Aruba's third-quarter earnings report.

Cisco was accused by the Street as having caused Aruba's revenue miss by using "aggressive discounting." Why, then, would everyone seem shocked by Cisco's slight decline in margins? It doesn't make sense.

On June 3, I talked about this very issue and mentioned that Cisco was sacrificing its margin to grow revenue, while squeezing rivals out of potential sales. It worked perfectly. But this quarter, Cisco had to "pay the piper."

So let's be careful to not exaggerate what's going on here. Because it's not as if Cisco's management weren't aware of the strategy they were using. Besides, let's not forget that even though gross margin did fall slightly, margin was almost 3% better on an adjusted basis. By and large, it seems that investors continue to miss some very important and meaningfully obvious factors.

Moving on to the issue of guidance, which admittedly was a disappointment. Management expects revenue for the fiscal first quarter to come in the range of $12.2 billion to $12.5 billion, compared with consensus estimates that were closer to $12.45 billion, or the higher-end of the range. But it still implies revenue growth of 5%, which is consistent with Cisco's historical average.

Here again, that the stock has taken such a hit to such a degree solely because management is being a bit cautious, makes no sense. I don't begrudge profit-taking. But let's call it what it is. The stock has had an incredible run this year and investors saw a selling opportunity -- I get it. But to the extent that Cisco's results were a "disappointment," I consider it irrational thinking.

This is still a long-term story. And until anything changes from a cash-flow perspective, which would impact Cisco's long-term revenue growth rate of 5%, this stock remains a strong buy.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

If you liked this article you might like

HPE's Earnings Beat Is Encouraging, but Don't Get Too Excited Just Yet

HPE's Earnings Beat Is Encouraging, but Don't Get Too Excited Just Yet

Jim Cramer: The Government Should Admit It Goofed With These Crazy Instruments

Jim Cramer: The Government Should Admit It Goofed With These Crazy Instruments

This Is the Perfect Time to Buy Dividend Stocks

This Is the Perfect Time to Buy Dividend Stocks

Goldman Bankers (Mostly) Upbeat on Tech M&A and IPO Trends

Goldman Bankers (Mostly) Upbeat on Tech M&A and IPO Trends

Wall Street Futures Are Upbeat Ahead of Long Weekend

Wall Street Futures Are Upbeat Ahead of Long Weekend