Is Cisco Systems Stock a Buy Now?

Cisco Systems' (CSCO 0.94%) 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?

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.

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.

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. 

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.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems and Zoom Video Communications. The Motley Fool has a disclosure policy.

Cisco Systems Is 'A Shelter In The Storm': 5 Analysts Deep Dive Into FQ4 Print

Shares of Cisco Systems Inc CSCO were rising on Thursday, after the company reported higher-than-expected revenues and earnings for its fiscal fourth quarter.

The results came amid an exciting earnings season. Here are some key analyst takeaways from the earnings release.

Morgan Stanley On Cisco Systems

Analyst Meta Marshall maintained an Equal-Weight rating while raising the price target from $55 to $56.

After a volatile earnings season in networking, Cisco Systems’ fiscal fourth quarter results were “a pleasant surprise,” Marshall said in a note.

Although the Cisco Live event highlighted a lack of traction with its refreshed security portfolio, the company “continues to be a shelter in the storm, able to deliver upon results and outlook given more diversified customer base than most networking companies (1mm+ customers and partners),” he added.

Needham On Cisco Systems

Analyst Alex Henderson reiterated a Hold rating on the stock.

Cisco Systems’ backlogs have depleted faster than expected and “is now expected to be largely completed in FY1Q,” Henderson said.

“Virtually all of FY24's earnings growth is expected in FY1Q, the quarter during which CSCO's backlog is expected to run off,” the analyst wrote. “We expect little to no growth after the backlog is consumed and forecast y/y quarterly EPS declines in FY2H,” he added.

Check out other analyst stock ratings.

Oppenheimer On Cisco Systems

Analyst Ittai Kidron reaffirmed an Outperform rating and price target of $58.

Cisco Systems reported solid quarterly results, driven by “stable demand and easing input costs,” Kidron wrote.

“The company delivered strong product growth (+20.4% YoY) as it continues to fulfill its substantial backlog, with particular strength in Secure Agile Networking (+33% YoY),” the analyst stated. “The results were balanced by a FY24 revenue guide that missed estimates as the COVID-related backlog normalizes,” he added.

KeyBanc Capital Markets On Cisco Systems

Analyst Thomas Blakey maintained a Sector Weight rating on the stock.

“Orders rebounded over 30% sequentially but were still down 14% y/y (vs. -6% compare in F4Q22),” Blakey wrote in a note.

“Cisco commentary was positive on stabilizing conditions including that its internal sales forecasts beat in July by several hundred million dollars,” he added. “The Company appeared confident on Ethernet-based AI (Silicon One) opportunities, highlighting $500M in AI orders to date, but sees demand inflection more likely in FY25, similar to peers,” the analyst further stated.

JMP Capital Markets On Cisco Systems

Analyst Erik Suppiger reiterated a Market Perform rating on the stock.

“F4Q23 order growth of (14%) Y/Y was an improvement from the (20%)+ growth in the past two quarters,” Suppiger said.

“Cisco’s transition into more of a software company was relatively robust, with software growth of 17% in F4Q23, and software subscription sales growth of 20% Y/Y,” he added.

CSCO Price Action: Shares of Cisco Systems had risen by 4.66% to $55.43 at the time of publication Thursday.

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