Is It Time to Buy Cisco Systems Stock?

Cisco Systems' (CSCO -0.50%) stock price has advanced about 7% over the past three months, even as concerns about inflation, rising interest rates, and geopolitical conflicts weighed down the tech sector.

The networking giant's stock also continued to rise after it posted a solid second-quarter earnings report on Feb. 16. So should investors consider Cisco a safe stock to own in this volatile market?

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Another quarter of revenue growth

Cisco's revenue rose 6% year over year to $12.7 billion in the second quarter of fiscal 2022, which beat analysts' expectations by $30 million. It also marked its fourth consecutive quarter of year-over-year revenue growth. Its adjusted EPS grew 6% to $0.84 and beat estimates by $0.16.

Source: Cisco. YOY = Year over year.

Starting in fiscal 2022, Cisco replaced its four reporting segments (infrastructure platforms, applications, security, and services) with six new segments (secure, agile networks; hybrid work; end-to-end security; internet for the future; optimized application experiences; and services).

Cisco claims that reorganization will give investors a clearer view of its slower-growth and higher-growth businesses. Here's how these six new segments fared in the first two quarters of 2022:

Data source: Cisco. YOY = Year over year.

The secure, agile networks division benefited from rising sales of switches and wireless hardware across the data center and enterprise campus markets, which offset its softer sales of enterprise routers.

Its end-to-end security segment posted accelerating revenue growth, driven by robust demand for its Zero Trust and Duo services. Its internet for the future segment -- which houses its cloud-enhanced routing solutions and optical chips -- benefited from its takeover of Acacia Communications and the secular expansion of the edge networking market.

The optimized applications business continued to flourish as it benefited from its acquisitions of AppDynamics, Intersight, and Thousand Eyes.

A few recent rumors also suggested that Cisco was mulling a $20 billion takeover of Splunk (SPLK) to expand this growing business. But when directly questioned about Splunk during Cisco's latest conference call, CEO Chuck Robbins said the company was taking a "very, very disciplined" approach to new deals -- which suggests a deal might be off the table.

The hybrid work segment, which Cisco will rename again as the "collaboration" segment starting in the third quarter, has consistently been its weakest link. It's struggling with waning demand for its on-site conference call, meetings, and contact center products, all of which are being disrupted by cloud-based services like Zoom Video Communications and Five9.

Cisco's own legacy video conferencing platform, Webex, hasn't gained much traction against those newcomers, and its own transformation into a cloud-based communications platform has been relatively sluggish.

Cisco expects its revenue to rise 3%-5% year over year in the third quarter, and increase 5.5%-6.5% for the full year. Those estimates were in line with its investor day estimates from last September, when it predicted its annual revenue would grow at a compound annual growth rate (CAGR) of 5%-7% between fiscal 2021 and 2025. It can maintain that stable forecast because its backlog more than doubled to a "record" high in the second quarter.

Stable margins and big buybacks

Cisco's adjusted products, service, and total gross margins all declined year over year but expanded sequentially:

Data source: Cisco.

That year-over-year contraction was mainly caused by higher component costs and supply chain constraints. Cisco expects that pressure to reduce its adjusted gross margin to about 64% in the third quarter, but to stabilize at 64%-65% in the second half of the year.

That situation isn't ideal, but Cisco just authorized another $15 billion buyback -- which boosts its authorization to $18 billion -- to cushion the blow. It also raised its quarterly dividend by a penny to $0.38 per share, which marks its 12th dividend hike and boosts its forward yield to 2.7%.

Cisco expects its adjusted earnings per share to rise 2%-5% year over year in the third quarter, and to grow 6%-7% for the full year. That also matches its investor day target for a 5%-7% CAGR for its EPS from 2021 to 2025.

Cheap, boring, but stable

Cisco's stock trades at 16 times forward earnings. Its business is big and boring, but it's firmly profitable, its growth is stable, and it generates plenty of cash. That stability should make Cisco a compelling stock to own as rising interest rates spark a retreat toward income-generating value stocks.