Cisco Systems' (CSCO -0.46%) stock rose 3% on Aug. 17 after the networking giant posted its latest earnings report. For the fourth quarter of fiscal 2023, which ended on July 29, its revenue rose 16% year over year to $15.2 billion and exceeded analysts' estimates by $150 million. Its adjusted earnings per share (EPS) rose 37% to $1.14 and also cleared the consensus forecast by $0.08. Those headline numbers were impressive, but is Cisco still worth buying in this wobbly market?
Reviewing Cisco's previous challenges
Cisco is the world's largest producer of networking switches and routers. It also bundles cybersecurity, enterprise collaboration, and cloud-based data observability services with its hardware to lock in its customers and widen its moat.
Image source: Getty Images.
In fiscal 2023, Cisco generated 67% of its product revenue from its secure and agile networks division, which sells its switches, enterprise routers, and wireless products. Supply chain constraints curbed the growth of this business in fiscal 2022, and Cisco failed to meet the enterprise market's post-pandemic demand for new networking products. But it overcame those headwinds in fiscal 2023 -- and the segment's growth accelerated as it finally satisfied the market's pent-up demand.
The rest of Cisco's product revenue came from its "Internet for the Future" division (12%), which sells its top-tier 8000-series routers; its end-to-end security division (9%), which provides its cybersecurity services; its collaboration division (9%), which provides on-premise and cloud-based conferencing tools; and its optimized application experiences division (2%), which hosts its ThousandEyes observability platform.
Over the past year, Cisco's Internet for the Future sales accelerated again alongside its core secure and agile networks business as it overcame its supply chain issues. Its optimized application experiences segment also continued to expand as more companies adopted ThousandEyes to monitor their networks in real time.
However, its end-to-end security business suffered a slowdown as more companies reined in their cybersecurity spending in this tougher macro environment. Its collaboration business also struggled as the usage of cloud-based video conferencing platforms cooled off in a post-pandemic market. Cisco's Webex also still trails far behind Zoom Video Communications in that market.
How fast is Cisco growing?
But as the following table illustrates, Cisco's strengths easily offset its weaknesses -- and its year-over-year revenue growth has consistently accelerated over the past year.
|
Product Revenue Growth by Segment (YOY) |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Secure and agile networks |
(1%) |
12% |
14% |
29% |
33% |
|
Internet for the future |
(10%) |
(5%) |
(1%) |
5% |
3% |
|
End-to-end security |
20% |
9% |
7% |
2% |
0% |
|
Collaboration |
2% |
(2%) |
(10%) |
(13%) |
(12%) |
|
Optimized application experiences |
8% |
7% |
11% |
12% |
15% |
|
Total revenue |
0% |
6% |
7% |
14% |
16% |
Data source: Cisco. YOY = Year over year.
For the full year, Cisco's revenue and adjusted EPS rose 11% and 16%, respectively. For fiscal 2024, it expects its revenue to rise 0% to 2% as its adjusted EPS grows 3% to 5%. That slowdown can mainly be attributed to challenging comparisons against its robust recovery throughout fiscal 2023 instead of any major near-term challenges.
Will Cisco's margins continue to expand?
Cisco's revenue growth is cooling off again, but its adjusted gross and operating margins -- which were squeezed by supply chain constraints and high logistics costs in fiscal 2022 -- continued to expand sequentially and year over year.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Adjusted gross margin |
63.3% |
63% |
63.9% |
65.2% |
65.9% |
|
Adjusted operating margin |
32.4% |
31.8% |
32.5% |
33.9% |
35.4% |
Data source: Cisco.
For the first quarter of fiscal 2024, Cisco expects to maintain an adjusted gross margin of 65% to 66% and an adjusted operating margin of 34% to 35%. That stable margin expansion, along with its constant buybacks (it repurchased $10.6 billion in shares in fiscal 2023), should help it grow its EPS at a faster clip than its revenue throughout fiscal 2024.
Is it the right time to buy Cisco?
After a tough slowdown in fiscal 2022 and an impressive recovery in fiscal 2023, investors should expect Cisco to return to its historic norm of low-single-digit revenue and earnings growth in fiscal 2024.
But at $55, Cisco still looks cheap at 14 times its estimated adjusted EPS this year, and it pays a decent forward dividend yield of 3%. Its smaller rival Juniper, which experienced a similar recovery over the past year, trades at 12 times forward earnings and pays a slightly higher forward dividend yield of 3.2%.
Cisco's low valuation and high yield should limit its downside potential and make it good safe-haven stock for this wobbly market. It's not an exciting growth stock, but it could still generate consistent returns for patient, long-term investors.
