Cisco Systems (NASDAQ:CSCO)' recent acquisition of Splunk (NASDAQ:SPLK) for $28 billion has elicited a varied response from market observers, with the deal causing a slight dip in Cisco's stock. The companies anticipate that the merger will fortify digital resilience, generate recurring revenue, and enhance gross margins in the first fiscal year following the acquisition.
Splunk's impressive $3.86 billion Annual Recurring Revenue (ARR) and a 73.8% adjusted gross margin are among the potential benefits that Cisco is set to gain from this deal. According to InvestingPro data, Splunk's gross profit margin for the last twelve months (LTM2024.Q2) is at 78.53%, with a revenue growth of 26.47%. The company's revenue growth for the next quarterly fiscal year (FY2024.Q2) is projected to be 14.0%. These figures underscore the potential financial benefits of the acquisition for Cisco.
Yet, some critics perceive this as a strategic move by Cisco to distract attention from its intensifying competition with rapidly growing entities like Arista Networks (NYSE:ANET). An InvestingPro Tip suggests that Cisco has high earnings quality, with free cash flow exceeding net income, and it holds more cash than debt on its balance sheet. This suggests that Cisco's financial health may be more robust than critics suggest.
Concerns remain about the impact of the acquisition on Cisco's market share, which has been on a decline. The acquisition also doesn't seem to address this issue directly. According to InvestingPro data, Cisco's market cap is at 215.72B USD, with a revenue growth of 10.55% for LTM2023.Q4. These figures indicate that while Cisco's market share may be declining, the company's overall financial health remains strong.
The deal will see Splunk's CEO, Gary Steele, join Cisco's leadership team. This significant investment is expected to deplete Cisco's cash and equivalents reserve of $26.1 billion, which could strain its balance sheet and potentially mask underlying challenges. Yet, one of the InvestingPro Tips for Cisco is that the company has maintained dividend payments for 13 consecutive years, suggesting that the company's financial management is sound.
Analysts have given a 'Hold' rating on NASDAQ:CSCO stock, with Ittai Kidron of Oppenheimer being recognized as the most accurate analyst. The mixed reactions to the deal highlight the complexity of the situation and the uncertainty surrounding its potential outcomes. With the InvestingPro Fair Value for Cisco at 64.34 USD, the company's stock may still be an attractive investment despite the uncertainties surrounding the acquisition.
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