Is Cisco Systems Stock a Buy Now?

Cisco Systems (CSCO -0.17%) posted its latest earnings report on May 17. For the third quarter of fiscal 2023, which ended on April 29, the networking leader's revenue rose 14% year over year to $14.6 billion and beat analysts' estimates by $210 million. Its adjusted EPS grew 15% to $1.00 and cleared the consensus forecast by three cents.

Those growth rates were impressive, but Cisco's stock price only rose slightly after the report and remains more than 20% below its all-time high from December 2021. Should investors buy shares of this blue-chip tech stock as the bulls look the other way?

Image source: Getty Images.

Reviewing the key numbers

Cisco splits its business into five groups: secure and agile networks (50% of its revenue in the first nine months of fiscal 2023), internet for the future (10%), collaboration (7%), end-to-end security (7%), and optimized application experiences (1%). The remaining 25% came from its services unit. Here's how those groups fared over the past year.

Data source: Cisco. YOY = year over year.

Cisco's strengths clearly offset its weaknesses and resulted in its third consecutive quarter of accelerating revenue growth.

Its secure and agile networks division previously struggled throughout fiscal 2022 as the supply chain constraints disrupted its production of routers, switches, and other networking hardware. But over the past three quarters, the segment's growth accelerated as it overcame those disruptions. The market's demand for new campus and data switches, enterprise routers, and wireless products also stayed robust despite the macroeconomic challenges. 

Its internet for the future segment expanded as more customers purchased its core Cisco 8000 routers, while the optimized application experiences segment's accelerating growth was primarily driven by the double-digit growth of ThousandEyes -- the cloud-based network observability platform that it acquired in 2020.

But the two weak links were easy to spot. The growth of its end-to-end security services segment cooled off again as companies allocated less spending toward cybersecurity services. Its collaboration revenue also declined for the third consecutive quarter as companies relied less on its conferencing hardware and pivoted toward cloud-based collaboration platforms like Zoom Video Communications and Microsoft Teams.

Cisco expects its revenue to rise 14% to 16% year over year in the fourth quarter and 10% to 10.5% for the full year. That would represent a significant acceleration from its 3% growth in fiscal 2022 and 1% growth in fiscal 2021. It also reiterated its previous long-term outlook for 5% to 7% revenue growth from fiscal 2021 through fiscal 2025.

Its margins are stabilizing

Back in fiscal 2022, Cisco's margins were squeezed by the aforementioned supply chain disruptions. But as those headwinds dissipated, its margins gradually stabilized. Cisco's adjusted gross and operating margins still declined year over year in the third quarter, but both metrics expanded sequentially for the third consecutive quarter:

Data source: Cisco.

Cisco expects that stabilization to continue in the fiscal 2023 fourth quarter with an adjusted gross margin of 64.5% to 65.5% and an adjusted operating margin of 34% to 35%.

It expects its adjusted EPS to rise 27% to 29% year over year in the fourth quarter and 13% to 14% for the full year. And just as with its revenue, it reiterated its long-term forecast for 5% to 7% adjusted EPS growth from fiscal 2021 through fiscal 2025.

Its stock is cheap, and it pays an attractive dividend

Cisco's stock trades at just 11 times forward earnings and pays a forward yield of 3.3%. That low valuation and high yield should limit its downside potential. Cisco probably won't generate massive returns anytime soon, but I believe it's a great place for most investors to park their cash as the bear market drags on.