Many tech stocks rebounded in 2023 from the prior year's steep downturn, and Silicon Valley veteran Cisco Systems (CSCO -0.50%) was among them. Shares reached a 52-week high of $58.19 on Sept. 1. But the stock plunged in mid-November after Cisco released earnings for its fiscal first quarter, which ended Oct. 28. Investors clearly found something in the earnings report concerning.
For bargain hunters who are wondering if this drop has created a good buying opportunity, the question is: Are the things that triggered the sell-off long-term issues, or short-term ones that can be expected to eventually dissipate? Let's dive in and see.
Cisco's successes
Cisco actually delivered amazing results in the latest quarter. It was the strongest Q1 in company history in terms of revenue and profit. Sales rose 8% year over year to $14.7 billion, and net income grew 36% to $3.6 billion as the company met pent-up demand that had been left previously unfilled due to supply chain constraints.
The balance sheet was strong as well. At the end of the quarter, Cisco's assets totaled $98.8 billion compared to $53.6 billion in liabilities, and it had $23.5 billion in cash, cash equivalents, and investments.
Pending challenges
So why did the stock sink after Cisco posted such spectacular results? Because management warned it was seeing signs that the surge in demand was starting to subside -- namely, product orders declined 20% in the quarter.
As a result, the company offered revenue guidance of at least $12.6 billion for its fiscal Q2, which would be down significantly from the prior-year period's $13.6 billion. Management also forecast that the period of waning customer demand could last a couple of more quarters before it rose back toward normal levels. That weak near-term outlook led to the sell-off of Cisco stock.
But investors who are focused on the long term should keep in mind that this short-term headwind is expected to subside eventually, after which the stock will be poised to recover. And one key reason to be confident in Cisco's ability to bounce back is its software business.
Though Cisco built its reputation as a computer networking company, it has also developed a substantial set of software offerings, including IT systems monitoring and cybersecurity. This allows it to generate predictable recurring revenue through software-as-a-service (SaaS) subscriptions. Its SaaS segment isn't as sensitive to cyclical ups and downs as its hardware business.
To buy or not to buy Cisco
Cisco's SaaS offerings will strengthen after the company closes its acquisition of cybersecurity analytics firm Splunk in 2024. Splunk's solutions provide complementary capabilities that will enhance Cisco's cybersecurity product suite.
Also, Splunk's revenue, net income, and free cash flow all grew year-over-year in its fiscal third quarter, which ended Oct. 31. Splunk's business is prospering with $1.1 billion in fiscal Q3 sales -- revenue that will add to Cisco's top line next year.
Splunk's free-cash-flow growth should be a particularly attractive feature for income investors since it will add to Cisco's ability to maintain its dividend, which yields over 3% at the current share price. And Cisco has raised its payouts for 13 consecutive years, a solid track record. So long-term investors can collect Cisco's dependable dividend while waiting for its stock to bounce back.
In the wake of Cisco's recent share price drop, now is a good time to buy the stock to hold for the long term. Cisco's business will be even more well-positioned once its acquisition of Splunk closes and its sales bounce back from the looming cyclical downturn.
In the meantime, investors can benefit from Cisco's dividend, which makes it a good income stock. These factors point to Cisco as a worthwhile investment for the long haul.
