Cisco Systems (CSCO)

Total return at 5 years: -4.0%/year = -5.8% appreciation + 1.8% dividend. The target price ($86) is ex-dividend; the $9 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $107 · Multiples $77) is below the market price ($115).

Today — expensive, no margin of safety: at $115 trades ~50.4% above its value discounted to today (~$77); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$49.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($115) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (10.6%/year) above our base case (9.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$21.9 bn of owner earnings in year 5 (vs ~$20.3 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/NOPAT (owner earnings, con el SBC expensado). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is fiscal 2026, closed Jul 25, 2026 (revenue $63.3bn, XBRL), which coincides with the fiscal close, so the +1y window is exactly the fiscal 2027 the company guides. The metric is EV/NOPAT (owner earnings): the year-0 adjusted EBIT margin (25.7%) expenses SBC ($3.83bn, a real cost) and adds back the acquisition-intangible amortization included in operating expenses ($0.92bn, non-economic); the rate is normalized to 19%, in line with the adjusted effective rate the company itself publishes (18.5% guided for 2027). NOPAT is used instead of owner-FCF because operating cash flow remains distorted by temporary items — the final transition-tax payment and Silicon One inventory build for hyperscalers — it was flat at $14.2bn while earnings grew 30%. Year 1 is anchored to the guidance published Aug 12, 2026, read with its two anchors: revenue of $72.2-73.4bn — midpoint $72.8bn, +15.0% — and GAAP earnings per share of $4.00-4.06; the adverse scenario takes the low end of the range and the favorable the high end, and the year-1 margin (25.9%) is the one that reproduces the guided earnings per share in all three. From there the path decays smoothly to 5% by year 5, with the endpoint anchored to the moat and the addressable market, not to year 1. The rebound is sustained by AI networking demand — product orders +35% year-over-year in the quarter, +25% excluding hyperscalers, and the eighth consecutive quarter of double-digit networking growth — and is organic, not a comparison effect: Splunk has now completed two full fiscal years inside the base. The adverse scenario stresses the speed of the deceleration and margin compression, not year 1, which guidance fixes. Net debt ($13.6bn: $29.5bn of debt against $15.9bn of cash and investments) sits in the bridge. Net buyback ~1%/year ($6.1bn repurchased, but SBC dilutes away roughly half), hence a modest, price-conscious share path.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $86 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $115, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $86 in 5 years plus $9 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $77. Against the current market price ($115), the margin of safety is -50.4% (trades above the maximum → a premium is paid) and the total return at that price would be -4.0% annually.

• Multiple vs the band. EV/NOPAT 36× today — well above the center of the mature-software band (14-20×); its earnings yield sits below the risk-free rate. The non-GAAP P/E (26×) is misleading (adds back stock-based compensation).
• The AI re-rating. The price already reflects the enthusiasm over AI infrastructure demand. The price ran ahead of value: not even the bull case (~9% growth + 20×) reaches today's price.
• Margin of safety. Base 5-year ~$68 vs price ~$110.70 → total return -4%/year. No margin; unfavorable asymmetry (limited upside, wide downside).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (100%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. ROIC ~19% — above the bar (the core is asset-light, high-return; Splunk's goodwill dilutes it). Genuine quality in the underlying business.
• Quality of cash. Stock-based compensation (~$3.85bn) is the hidden cost: the non-GAAP figure adds it back. Expensing it, owner earnings (~$12.3bn) is lower than the non-GAAP figure (~$16bn). Valued on NOPAT (stock-based compensation expensed).
• Balance sheet. Flipped to net debt (~$14.7bn) after Splunk, but solid (investment grade), comfortable coverage. Cash flow comfortably covers the dividend + the buyback.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Fiscal 2026's engine was not recurrence but equipment: product grew 16% and subscription just 1%, with total software at $23.2bn (+4%). Within that product line, AI infrastructure sold to hyperscalers went from under 2% of revenue to nearly 6%, and the company itself flags it as a significant driver for 2027 as well, while disclosing the customer-concentration and supply risk it carries. Contracted demand backs it up: the quarter's product orders grew 35% year-over-year (25% excluding hyperscalers) and the contracted backlog rose 7%. The quarterly dividend was raised to $0.42 per share, and the buyback ($6.1bn in the fiscal year, at an average price of $111.53 in the latest quarter) reduces the share count by roughly 1% per year net of dilution.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (25-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. AI-networking growth (+25%) is real but lumpy; Splunk's (Security +59%) is M&A, not organic. The core declines −3%. The durable rate is ~6%.
• Growth engine. AI networking (Ethernet for clusters, Silicon One) + subscription. But the mature core + softening subscription (−2%) + the flat backlog limit the consolidated figure.
• Dispute / cycle. AI networking is contested (Arista/Nvidia) + lumpy (hyperscaler orders); the margin compresses on the mix. The highest-quality growth is the most contested.

• Relevant in 10 years (recurrence). Enterprise networking + subscription (56%, ARR $17.0bn) are critical infrastructure with recurrence. The AI wave expands demand. High recurrence in the core; the AI front is more volatile.
• Pricing power. Strong in the core (captive installed base) but pressured by white-box + Chinese pricing + Arista on the AI front; gross margin is compressing (−2.0pp).
• Moat and its direction. Wide moat in the core but weak in the AI back end (the fastest-growing front); direction stable, not widening. Barriers to entry are 'relatively low' according to the 10-K.
• Competitive dispute in AI. In AI networking it competes with Arista/Nvidia/Broadcom where hyperscalers buy on performance/price — the central disconfirmer of the bull case.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.8x
• ✓Interest coverage (EBIT / interest)9.5x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 100% of ROIC
• ✓Value creation (ROIC − 10% bar)+9pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.8x — no over-investment
• !Float / working capitalConsumes cash $0.7 bn (positive WC)
• !Dilution (SBC % of revenue + shares)SBC 6.1% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt ~$14.7bn (flipped from net cash after Splunk); investment grade, comfortable coverage. Manageable.
• Cash generation. Free cash flow ~$11.8bn; returns 94% to shareholders. Stock-based compensation (~$3.85bn) is the real cost the non-GAAP figure hides.
• Dividend sustainability. Free cash flow comfortably covers the dividend (~$6.5bn) + the buyback. The aristocrat dividend (14 years) is solid.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Robbins 14× salary in shares (requirement 6×); base salary frozen since 2020. Dispersed ownership (no founder control). Reasonable alignment.
• Capital allocation. Returns 94% of free cash flow (dividend aristocrat + buyback). ⚠️ Buys back at a multiple well above the band — expensive, destroys value. Splunk ($27bn) was a large bet.
• Execution / integrity. The shift to subscription was executed successfully. The Splunk integration is underway (consumption migrating to cloud). A CFO transition. Recurring restructuring (third plan in three years).

• It is not cheap: the price incorporates the AI investment cycle that fiscal 2026 made visible and that 2027 guidance extends. The market is paying for growth the company is actually delivering and has under contract, not discounting a problem.
• The non-GAAP figure makes it look more reasonable than it is: it adds back $3.83bn of stock-based compensation, which is just 6% of revenue but 30% of free cash flow. Expensing it, owner earnings trades at ~36× EV/NOPAT, an earnings yield under 3%.
• What the price does not distinguish is growth composition: it pays as recurrence for a rebound that came from product (+16%) while subscription grew 1%, and it treats as an annuity a demand the company itself describes as especially volatile and concentrated among few customers.

Cisco is not cheap, and the gap between perception and reality runs in the opposite direction from an opportunity. There are no missing buyers and no motivated sellers: there is a real, contracted, and guided demand cycle that the price already pays for in full. The remaining question is not whether the business will grow — the company's guidance and backlog say it will — but whether that growth is an annuity or a cycle. The fiscal year's composition suggests the latter: the recurring part grew 1%, and the part that grew is the one the company itself describes as volatile and concentrated. At this price, the favorable scenario barely exceeds today's quote; the margin is missing.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -11%/year (-43% total): the margin of safety protects the downside. The bull (+2%/year, +10% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• AI share loss. The central disconfirmer: Arista/Nvidia/Broadcom in the AI Ethernet back end, where Cisco's moat is weak. If it loses the fastest-growing front, the bull thesis collapses.
• Margin compression. −2.0pp last quarter on the AI/webscale mix + memory; if it continues, NOPAT grows slower than revenue.
• Stretched valuation. 36× EV/NOPAT on AI enthusiasm; the price discounts more than the business (mature core, weak AI moat) can deliver.
• Commoditization. White-box hardware + Chinese pricing in the core; barriers 'relatively low' according to the 10-K. A structural long-term pressure on the margin.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 19% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 9% at a multiple/growth of 3.9 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 3% (EBIT/EV) + ROIC 19% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 11%, in line with our 9%: perception and reality aligned.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -13%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale, network effects → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price implies 11% vs our 9%: coherent, but at the optimistic end of the range.