Is Cisco Systems Stock a Buy Now?

Cisco Systems' (CSCO 1.04%) stock jumped 5% on Feb. 16 after the networking hardware and software giant posted its latest earnings report. For the second quarter of fiscal 2023, which ended on Jan. 28, Cisco's revenue rose 7% year over year to $13.6 billion and beat analysts' estimates by $190 million.

Its adjusted earnings rose 5% to $0.88 per share and cleared the consensus forecast by two cents. Those growth rates seem steady, but is Cisco's stock still worth buying as a safe haven play in a volatile market?

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Another quarter of accelerating growth

Cisco operates five main business segments: secure and agile networks (49% of its revenue in the first half of fiscal 2023); internet for the future (10%), collaboration (8%), end-to-end security (7%), and optimized application experiences (1%). The remaining 25% came from its services unit. Here's how its five main product segments fared over the past year.

Data source: Cisco. YOY = Year-over-year.

Cisco's accelerating growth in the first half of fiscal 2023 can be attributed to the secure and agile networks unit, which houses its switches, routers, and networking hardware. This business struggled with supply chain disruptions throughout fiscal 2022, but those headwinds gradually waned this year. That normalization enabled Cisco to finally address the pent-up demand for its networking hardware as more companies upgraded their infrastructure.

That cyclical trend has been largely resistant to the macro headwinds. During the conference call, CEO Chuck Robbins said the "overall demand environment remains steady" and its "pipeline and win rates remain stable." The growth of the internet of the future unit also stabilized after lapping its acquisition of Acacia Communications over the past year. The end-to-end security unit continued to generate stable growth, thanks to its unified threat management and zero-trust services.

But the collaboration unit (which houses its on-site teleconferencing devices and Webex video conferencing platform) remained weak due to the post-pandemic slowdown and stiff competition from newer video conferencing platforms like Zoom Video Communications (ZM 0.81%). Meanwhile, the double-digit growth of its cloud-based network observability service ThousandEyes continued to drive the growth of its fledgling optimized application experiences unit.

Cisco expects its acceleration to continue with 11%-13% year-over-year revenue growth in the third quarter. For the full year, it expects its revenue to rise 9%-10.5%, compared to its prior outlook for 4.5%-6.5% growth.

Its margins are stabilizing

Cisco's adjusted gross margin fell 160 basis points year over year to 63.9% in the second quarter as component costs for its networking hardware remained elevated, but that actually represented a 90 basis point improvement from the first quarter. It expects its adjusted gross margin to remain relatively stable at 63.5%-64.5% in the third quarter as it navigates the inflationary and supply chain headwinds while expanding its higher-margin software-oriented businesses.

Its adjusted operating margin fell 180 basis points year over year to 32.5% in the second quarter, but that also marked a 70 basis improvement from the previous quarter. It expects that figure to rise sequentially to 33%-34% in the third quarter.

Cisco's accelerating revenue growth and stabilizing margins prompted it to issue rosy forecasts for its near-term profits. It expects its adjusted EPS to rise 10%-13% year over year in the third quarter and 11%-12% for the full year, compared to its prior full-year forecast for just 4%-7% earnings growth.

The company also raised its quarterly dividend by a penny to $0.39 per share, which marks its 13th consecutive annual hike and boosts its forward yield to 3.1%.

Its stock is still cheap and safe

Cisco's stock trades at just 14 times forward earnings. Its smaller rival Juniper Networks (JNPR 0.38%) is growing at a similar clip and trades at the same forward multiple, but it pays a lower forward dividend yield of 2.8%.

Cisco's business is finally stabilizing and accelerating, and it seems like it can easily achieve its long-term goals (which it set in Sept. 2021) of growing both its annual revenue and adjusted EPS at compound annual growth rates (CAGR) of 5% to 7% between fiscal 2021 and 2025. Cisco's stock might not skyrocket this year, but it should remain a reliable safe-haven investment that should generate rock-solid returns even as rising interest rates rattle the broader markets.