Source: PaxForex Premium Analytics Portal, Fundamental Insight
Cisco Systems released its most recent earnings report on May 17th. In the third quarter of fiscal 2023, which concluded on April 29th, the leading networking company witnessed a remarkable 14% year-over-year increase in revenue, amounting to $14.6 billion. This figure surpassed analysts' expectations by an impressive $210 million. Additionally, Cisco's adjusted earnings per share (EPS) experienced a solid 15% growth, reaching $1.00 and surpassing the consensus forecast by three cents.
Despite these impressive growth rates, the stock price of Cisco showed only a slight increase following the report. Furthermore, it currently stands over 20% lower than its all-time high in December 2021. Given this scenario, the question arises: should investors consider purchasing shares of this well-established technology company, especially when market sentiment seems to be leaning in a different direction?
Cisco organizes its business into five distinct groups, each contributing to its overall revenue. In the first nine months of fiscal 2023, the secure and agile networks division accounted for 50% of Cisco's revenue. The Internet for the future group constituted 10%, collaboration accounted for 7%, end-to-end security accounted for 7%, and optimized application experiences contributed 1%. The remaining 25% came from its services unit. Let's delve into how these groups performed over the past year.
Cisco's overall strengths managed to outweigh its weaknesses, resulting in three consecutive quarters of accelerated revenue growth. The secure and agile networks division faced challenges in fiscal 2022 due to disruptions in the supply chain, which affected the production of routers, switches, and other networking hardware. However, over the past three quarters, this segment experienced a notable acceleration in growth as it successfully navigated through those disruptions. Despite macroeconomic challenges, the market demand for a new campus and data switches, enterprise routers, and wireless products remained strong and robust.
The internet for the future segment of Cisco experienced expansion, fueled by an increasing number of customers opting for its core Cisco 8000 routers. On the other hand, the accelerating growth of the optimized application experiences segment can be attributed to the strong performance of ThousandEyes, a cloud-based network observability platform that Cisco acquired in 2020.
However, two areas showed signs of weakness. The end-to-end security services segment witnessed a slowdown in growth, reflecting a decrease in spending by companies on cybersecurity services. Additionally, Cisco's collaboration revenue declined for the third consecutive quarter as businesses shifted away from its conferencing hardware and embraced cloud-based collaboration platforms such as Zoom Video Communications and Microsoft Teams.
Cisco anticipates a noteworthy year-over-year revenue increase of 14% to 16% in the fourth quarter and a growth rate of 10% to 10.5% for the entire fiscal year. This projected growth represents a significant acceleration compared to the 3% growth experienced in fiscal 2022 and the 1% growth in fiscal 2021. Cisco also restated its long-term outlook, affirming its previous forecast of 5% to 7% revenue growth from fiscal 2021 through fiscal 2025.
During fiscal 2022, Cisco faced margin challenges due to the aforementioned disruptions in the supply chain. However, as these obstacles gradually dissipated, the company's margins began to stabilize. In the third quarter, although Cisco's adjusted gross and operating margins declined year over year, both metrics exhibited sequential expansion for the third consecutive quarter.
Cisco foresees the continuation of stabilization in the fourth quarter of fiscal 2023, with an expected adjusted gross margin ranging from 64.5% to 65.5%, and an adjusted operating margin ranging from 34% to 35%.
In terms of adjusted earnings per share (EPS), Cisco anticipates a year-over-year increase of 27% to 29% in the fourth quarter and a growth rate of 13% to 14% for the full fiscal year. Consistent with its revenue outlook, the company reiterates its long-term forecast of 5% to 7% adjusted EPS growth from fiscal 2021 through fiscal 2025.
With Cisco's stock currently trading at a relatively low multiple of 11 times forward earnings and offering a forward yield of 3.3%, its valuation appears attractive, limiting potential downsides. While the company may not deliver extraordinary returns in the immediate future, it is considered a favorable investment option for most investors during a prolonged bear market.
As long as the price is above 46.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 49.00
- Take Profit 1: 51.00
- Take Profit 2: 52.00
Alternative scenario:
If the level of 49.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 49.00
- Take profit 1: 44.00
- Take Profit 2: 42.00
