Source: PaxForex Premium Analytics Portal, Fundamental Insight
Last Thursday, Cisco Systems experienced a 3% increase in its stock value subsequent to the release of its most recent earnings report. In the fourth quarter of fiscal 2023, concluding on July 29, the company witnessed a 16% year-over-year revenue growth, reaching $15.2 billion, which surpassed analysts' projections by $150 million. Moreover, its adjusted earnings per share (EPS) saw a significant rise of 37% to $1.14, surpassing the consensus forecast by $0.08. Although these prominent figures garner attention, the question remains whether Cisco remains a prudent investment amidst the current uncertain market conditions.
Distinguished as the world's leading manufacturer of networking switches and routers, Cisco extends its offerings to encompass cybersecurity, enterprise collaboration, and cloud-based data observability services alongside its hardware. This strategic bundling serves to both retain its clientele and fortify its competitive advantage.
During the fiscal year 2023, a significant portion of Cisco's product revenue, specifically 67%, originated from its division specializing in secure and agile networks. This division encompasses the sale of switches, enterprise routers, and wireless products. In the previous fiscal year, the growth of this sector was constrained due to supply chain limitations, which hindered Cisco's ability to meet the heightened demand for new networking products in the enterprise market that emerged in the wake of the pandemic. However, in fiscal 2023, these challenges were surmounted, resulting in an accelerated growth trajectory for this segment, driven by the fulfillment of pent-up market demand.
The remaining portion of Cisco's product revenue was derived from distinct divisions, including the "Internet for the Future" division (12%), responsible for top-tier 8000-series routers; the end-to-end security division (9%), offering cybersecurity services; the collaboration division (9%), providing both on-premise and cloud-based conferencing tools; and the optimized application experiences division (2%), hosting the ThousandEyes observability platform.
Over the past year, Cisco's "Internet for the Future" sales regained momentum alongside the core secure and agile networks business as supply chain hurdles were overcome. Simultaneously, the optimized application experiences segment continued its expansion, fueled by a growing number of companies adopting ThousandEyes for real-time network monitoring.
However, Cisco's end-to-end security division faced a deceleration as many companies tightened their spending on cybersecurity within a more challenging macroeconomic environment. Additionally, the collaboration division encountered difficulties due to decreased usage of cloud-based video conferencing platforms in a market that had moved beyond the immediate impacts of the pandemic. Notably, Cisco's Webex platform still lagged significantly behind Zoom Video Communications in this particular market.
Cisco's strengths effectively counterbalance its weaknesses, evident by its consistent acceleration in year-over-year revenue growth over the past year.
Over the course of the full year, Cisco achieved an 11% rise in revenue and a 16% increase in adjusted EPS. Looking ahead to fiscal 2024, the company anticipates a revenue uptick of 0% to 2%, coupled with a 3% to 5% growth in adjusted EPS. This deceleration is primarily attributed to the demanding benchmarks set by its robust recovery in fiscal 2023, rather than facing any significant imminent challenges.
While Cisco's revenue growth is tempering, its adjusted gross and operating margins, which were previously impacted by supply chain bottlenecks and elevated logistics costs in fiscal 2022, continue to expand both sequentially and year over year.
In the initial quarter of fiscal 2024, Cisco foresees maintaining an adjusted gross margin ranging from 65% to 66%, and an adjusted operating margin within the range of 34% to 35%. This consistent margin expansion, coupled with its ongoing share buybacks (amounting to $10.6 billion in repurchases during fiscal 2023), is expected to contribute to an EPS growth rate surpassing its revenue growth throughout fiscal 2024.
Following a challenging slowdown in fiscal 2022 and an impressive recovery in fiscal 2023, it's reasonable for investors to anticipate Cisco reverting to its historical pattern of low-single-digit growth in both revenue and earnings during fiscal 2024.
Despite these considerations, at a valuation of $55 per share, Cisco's current trading multiple of 14 times its projected adjusted EPS for the year appears favorable. Additionally, the company offers a respectable forward dividend yield of 3%. In comparison, its smaller competitor, Juniper, which has undergone a comparable recovery over the past year, trades at forward earnings multiple of 12 and presents a slightly elevated forward dividend yield of 3.2%.
Given Cisco's conservative valuation and attractive yield, the downside risk appears limited, rendering it a viable safe-haven stock in the midst of market volatility. While not a high-growth stock, it possesses the potential to deliver consistent returns for patient, long-term investors.
As long as the price is above 52.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 54.92
- Take Profit 1: 56.00
- Take Profit 2: 58.00
Alternative scenario:
If the level of 52.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 52.00
- Take profit 1: 50.00
- Take Profit 2: 48.00
