Source: PaxForex Premium Analytics Portal, Fundamental Insight
Shares of Cisco Systems jumped 5 percent after the latest earnings report was released. For Q2 of fiscal 2023, which ended Jan. 28, Cisco's revenue rose 7% YoY to $13.6 billion and beat analysts' forecasts by $190 million.
Adjusted earnings rose 5% to $0.88 per share and beat consensus estimates by two cents. That growth rate seems solid, but is Cisco stock worth buying in such a volatile market?
For those not quite up to speed, Cisco operates in five major business segments: secure and agile networks (49% of revenues in the first half of fiscal 2023), Internet of the Future (10%), collaboration (8%), end-to-end security (7%) and application optimization (1%). The remaining 25% comes from the services division.
Cisco's growth acceleration in the first half of fiscal 2023 can be attributed to the secure and flexible networks division, which houses switches, routers, and networking equipment. During fiscal 2022, this division experienced difficulties related to supply chain disruptions, but these difficulties gradually eased this year. This normalization has allowed Cisco to finally meet pent-up demand for networking equipment as more companies upgrade their infrastructure.
This cyclical trend is largely countered by macroeconomic factors. During the conference, CEO Chuck Robbins said the company's "overall demand situation remains stable," and its "pipeline and win rates remain stable." Growth in the Internet of the Future division has also stabilized since Acacia Communications acquired Acacia in 2022. The end-to-end security division continued to show steady growth thanks to unified threat management and zero-trust services.
However, the collaboration division (which houses on-premises teleconferencing devices and the Webex video conferencing platform) remained weak due to the post-pandemic recession and stiff competition from new video conferencing platforms such as Zoom Video Communications. Meanwhile, double-digit growth in cloud-based network surveillance service ThousandEyes continued to drive growth in its nascent Application Experience Optimization division.
For Q3, Cisco expects revenue growth to continue to accelerate 11%-13% YoY. For the full year, revenue is expected to grow 9%-10.5% from the previous forecast of 4.5%-6.5% growth.
In Q2 Cisco's adjusted gross margin declined 160 basis points YoY to 63.9% as the cost of components for its networking equipment remained elevated, but that actually represented a 90 basis point improvement over Q1. The company expects adjusted gross margin to remain relatively stable at 63.5%-64.5% in Q3 as it overcomes inflationary factors and supply chain hurdles while expanding its more profitable software-focused businesses.
In Q2, the adjusted operating margin declined 180 basis points YoY to 32.5 percent, but it also marked a 70 basis point improvement from the previous quarter. The company expects the figure to rise sequentially to 33%-34% in Q3.
Accelerating revenue growth and stabilizing margins have prompted Cisco to issue a rosy outlook for its earnings in the near term. The company expects adjusted earnings per share to grow 10%-13% in Q3 and 11%-12% for the full year, compared with its previous forecast of 4%-7% earnings growth for the full year.
The company also raised its quarterly dividend by a penny to $0.39 per share, its 13th consecutive increase, and boosted its projected yield to 3.1%.
Cisco's stock is trading at just 14 times its earnings forecast. Its smaller rival Juniper Networks is growing at a similar pace and is trading at a similar forward multiple, but its dividend yield is lower at 2.8%.
Cisco's business is finally stabilizing and accelerating, and it looks like the company could easily meet its long-term goals (which it set in September 2021) of increasing annual revenue and adjusted earnings per share at a compound annual growth rate (CAGR) of 5% to 7% from fiscal 2021 to 2025. Cisco stock may not skyrocket this year, but it should remain a solid asset capable of delivering solid returns even as interest rates rise in the broader markets.
As long as the price is above 46.50, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 49.61
- Take Profit 1: 51.00
- Take Profit 2: 54.00
Alternative scenario:
If the level of 46.50 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 46.50
- Take profit 1: 44.00
- Take Profit 2: 42.00
