While many tech companies that serve enterprises are experiencing increasing caution from their customer bases, networking-hardware giant Cisco Systems (CSCO +1.14%) has been an exception. The company handily beat analyst expectations for the fiscal fourth quarter, which ended on July 29. Total revenue grew 16% year over year to $15.2 billion, while adjusted earnings per share shot up 37% to $1.14.
Shares of Cisco rose Thursday morning on the good news. Despite solid growth from the company over the past year, Cisco stock has barely edged out the S&P 500 in 2023. And over the past five years, it has lost badly to the broad stock market index.
With Cisco's business booming, should investors bet on a market-beating rally?
NASDAQ: CSCO
Key Data Points
The core business is strong but a slowdown is coming
One of Cisco's core strategies over the past few years has been to grow its software business. While Cisco's security and collaboration segments are software-heavy, software has also become a more important piece of the core networking segment.
Software revenue grew by 17% year over year in the fourth quarter, and subscription software revenue was up 20%. By adding sources of recurring revenue, Cisco ultimately makes its revenue more predictable and less prone to big swings driven by economic conditions.
It was the core networking segment that did most of the heavy lifting for Cisco in the fourth quarter. Revenue in this segment soared 33% year over year and accounted for more than half of total revenue. The rest of Cisco's bigger segments were less impressive.
Internet for the Future, which includes optical networking and 5G-related products, grew by just 3%, while the security segment was flat. The collaboration segment suffered a 12% decline.
Soaring demand for artificial intelligence (AI) should help Cisco in the long run. Training advanced AI models involves building vast clusters of GPUs or other AI chips, and moving data fast enough across the cluster is critical. Cisco's Silicon One family of chips is designed for extreme data throughput. Although this AI-centric business isn't contributing much to the top and bottom lines right now, Cisco views it as a significant long-term opportunity.
While Cisco's fourth-quarter results were impressive, the company expects a significant slowdown entering fiscal 2024. It sees full-year revenue between $57 billion and $58.2 billion, up just 0% to 2%, compared to fiscal 2023. Profit will grow faster, with adjusted earnings per share (EPS) guidance of $4.01 to $4.08, representing 4% growth at the midpoint.
Cisco's product backlog exploded during the pandemic due to supply chain constraints, and now the backlog is being worked down as the situation improves. The backlog was still double the normal level at the end of the fourth quarter, although the company expects much of the excess to be worked off in the first quarter of fiscal 2024. As the backlog normalizes, so will Cisco's growth rate.
An attractive price
Cisco's growth will ebb and flow, depending on economic conditions and other factors. The company's sluggish forecast for fiscal 2024 shouldn't be a concern for long-term investors.
At around $55 per share, Cisco stock trades for about 14x adjusted earnings. That looks reasonable and perhaps attractive, as long as the company can accelerate growth past fiscal 2024. The company also pays a solid dividend that currently yields about 3%.
While Cisco stock looks like a solid investment, a huge rally doesn't look like it's in the cards. Fiscal 2024 will be a relatively tough year, compared to fiscal 2023, and there's always a chance that worsening economic conditions will cause Cisco to come up short of its guidance. Also, the stock's valuation isn't so low that a big multiple expansion looks likely anytime soon.
The bottom line: Cisco stock is a buy, but don't expect it to trounce the broader market.
