What happened
Cisco (CSCO -0.50%) marched 10% higher last month, according to S&P Global Market Intelligence. The company's stock bucked a broader market decline thanks to a strong quarterly-earnings report on August 16.
So what
Cisco's fiscal fourth quarter beat Wall Street's expectations for both revenue and earnings. The company reported 16% revenue growth over the prior year, which the company attributed to several factors. Supply chain disruptions have been a major issue since 2020, and unexpected improvement to supply chain blockages positively impacted sales last quarter. The company is expanding its market share as macroconditions improve.
Cisco also benefited from its ongoing strategic shift toward recurring software-subscription revenue, which is contributing an increasing proportion of total income. That makes sales more predictable, and it's generally better for profitability and cash-flow generation. The company is also participating in the artificial intelligence boom, with demand surging for ethernet fabrics among cloud leaders.
Image source: Getty Images.
The improvements were even more impressive on the bottom line. Cisco delivered 37% growth in adjusted earnings and 62% growth in operating cash flows. The company's gross margin crushed its own expectations, allowing its earnings-growth rate to exceed sales growth, even though operating expenses kept pace with the top line. The gross-profit performance was attributed to pricing power, efficiency gains, and a favorable mix of sales by product and service category.
Last quarter's results displayed several very bullish signals for Cisco's demand and operational efficiency. It seems that both external and internal factors are pointing in the right direction for fundamental business gains.
Now what
Cisco's days of being considered a dynamic innovator are well in the past. It's been seen as a mature, low-growth, reliable performer in the tech sector for the past few decades. That classification as a value stock isn't going away any time soon, and it creates a viable opportunity for investor returns if the company continues to execute on this strategic shift to more recurring software-subscription revenue and higher-growth end markets.
Cisco has already delivered 33% returns to shareholders over the past year. Those returns are being driven by a combination of business growth and inflated-valuation ratios. Revenue and profit growth have fueled improving medium-term expectations among investors. As financial results climb higher, investor optimism has spurred the stock's key valuation ratios into more expensive territory. Cisco's enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio climbed from 10 to 12, while its dividend yield dropped from nearly 3.5% to 2.7%.
CSCO Dividend Yield data by YCharts
Despite the recent run-up in price and valuation inflation, Cisco is still relatively cheap, so there's still upside potential. The company doesn't expect much revenue growth next year, but it does forecast a modest improvement in profits, which should be attractive to value investors.
