Cisco's (CSCO -0.57%) stock price jumped 5% on Thursday, Nov. 17, after the networking hardware and software giant posted its latest earnings report. For the first quarter of fiscal 2023, which ended on Oct. 29, Cisco's revenue rose 6% year over year to $13.63 billion and beat analysts' estimates by $340 million. Its adjusted earnings rose 5% to $0.86 per share, which also cleared the consensus forecast by two cents.
Does that steady growth indicate Cisco's stock is worth buying again after being buffeted by macroeconomic headwinds over the past year? Let's review its previous challenges and its recent progress to decide.
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Why were investors worried about Cisco?
Last September, Cisco set some promising long-term goals during its investor day presentation. It predicted its revenue and adjusted EPS would both increase at a compound annual growth rate (CAGR) of 5% to 7% between fiscal 2021 and 2025, driven by the expansion of its subscription-based software and cybersecurity businesses.
But over the past year, Cisco's secure and agile networks division (which houses its switches, enterprise routers, and other wireless and access point hardware) struggled with supply chain disruptions, component shortages, and rising freight costs. The growth of that segment -- which generated 46% of its revenue last year -- decelerated throughout all of fiscal 2022 and declined 1% year over year in the fourth quarter. Its collaboration business, which brought in 9% of its revenue last year, also continued to wither as it struggled to keep pace with Zoom Video Communications and Microsoft Teams.
Those headwinds offset the stable growth of its end-to-end security and optimized applications businesses (16% of its fiscal 2022 revenue) as well the inorganic growth of the internet of the future division (10% of its revenue), which had been driven by its acquisition of Acacia Communications last March. As a result, Cisco's revenue growth flatlined in the third and fourth quarters of fiscal 2022 -- which cast a dark cloud over its ambitious investor day targets.
Why did Cisco's latest report clear away those clouds?
Cisco's first quarter report allayed those fears for three reasons. First, its secure and agile networks revenue rose 12% year over year -- on top of its 10% growth a year ago -- driven by strong sales of its networking hardware and a gradual easing of the supply chain headwinds. Its end-to-end security and optimized applications segments also continued to grow.
Those improvements boosted Cisco's revenue by 6% year over year during the first quarter. It expects that momentum to continue with 4.5%-6.5% growth in both the second quarter and the full year. CFO Scott Herren also reaffirmed the company's investor day goals of achieving 5%-7% revenue and earnings growth over the "long term" during the conference call.
Second, Cisco's margins are stabilizing. Its adjusted gross margin still shrank 150 basis points year over year to 63% in the first quarter -- mainly due to the impact of supply chain headwinds on its product gross margins -- but only declined 30 basis points sequentially. That compares favorably to its sequential drop of 200 basis points in the fourth quarter of 2022. Looking ahead, Cisco expects its adjusted gross margin to finally rise sequentially to 63%-64% in the second quarter. That's a bright green flag that suggests its supply chain headwinds are finally dissipating.
Lastly, that gross margin expansion prompted Cisco to provide upbeat earnings guidance for the rest of fiscal 2023. It expects its adjusted EPS to increase 0%-2% in the second quarter, and to rise 4%-7% for the full year. That's slightly higher than its prior full-year guidance for 4%-6% growth.
Cisco's stock is finally worth buying again
Cisco's stock lost more than a quarter of its value this year as investors fretted over its supply chain challenges and shrinking gross margins. However, its first-quarter report suggests those problems are transitory -- and that it's still well-poised to generate stable growth for the foreseeable future.
At $46 per share, Cisco trades at just 13 times this year's earnings. It also pays an attractive forward dividend yield of 3.3%, which accounts for less than half of its projected EPS for fiscal 2023. By comparison, Cisco's smaller rival Juniper Networks also trades at 13 times forward earnings but pays a lower forward dividend yield of 2.8%.
Cisco certainly isn't a stock for growth-oriented investors. However, investors who are looking for a stable blue-chip tech stalwart that is cheap and generates consistent dividends should consider picking up some shares today.
