Source: PaxForex Premium Analytics Portal, Fundamental Insight
Cisco Systems' stock price is up about 7 percent over the past three months, even as worries about inflation, rising interest rates, and geopolitical tensions have weighed on the technology sector.
Shares of the networking giant also continued to rise after the company's management presented a strong second-quarter report last week. So should investors consider Cisco a safe investment in this volatile market?
In Q2 of fiscal 2022, Cisco's revenues rose 6 percent year over year to $12.7 billion, $30 million above analysts' expectations. It also marked the fourth consecutive quarter of year-over-year revenue growth. Adjusted earnings per share rose 6 percent to $0.84 and exceeded estimates by $0.16.
Beginning in fiscal 2022, Cisco replaced its four reportable segments (infrastructure platforms, applications, security, and services) with six new segments (secure, agile networks, hybrid operations, end-to-end security, Internet of the future, optimized application experience, and services).
Cisco says the reorganization will give investors a clearer picture of the slow-growth and faster-growth lines of business. Here's what those six new segments looked like in the first two quarters of 2022:
The secure and agile networks division made the most of growth in switch and wireless equipment sales in the data center and enterprise campus markets, offsetting declines in enterprise router sales.
The end-to-end security segment showed accelerating revenue growth due to strong demand for Zero Trust and Duo services. The Internet of the future segment, which features cloud routing solutions and optical chips, benefited from the Acacia Communications takeover and consistent expansion of the edge networking market.
The optimized applications business continued to thrive with the acquisitions of AppDynamics, Intersight, and Thousand Eyes.
Several recent rumors also suggested that Cisco was considering a $20 billion takeover of Splunk to expand this growing business. But when asked directly about Splunk during Cisco's most recent conference call, CEO Chuck Robbins said the company takes a "very, very disciplined" approach to new deals, suggesting the deal could be delayed.
Cisco's hybrid work segment, which it will rebrand as a "collaboration" segment again starting in the third quarter, has consistently been its weakest link. It is struggling with falling demand for its on-site conferencing, meeting, and contact center products, all of which are being pushed back by cloud-based services such as Zoom Video Communications and Five9.
Cisco's legacy Webex video conferencing platform hasn't gained many advantages over these new products, and its own transformation into a cloud-based communications platform has been relatively sluggish.
Cisco anticipates its revenues to grow 3% to 5% year over year in the third quarter and 5.5% to 6.5% for the full year. Those estimates are consistent with forecasts made last September when the company predicted that its annual revenue would grow at a compound annual growth rate (CAGR) of 5%-7% from fiscal 2021 to 2025. The company can maintain this stable outlook as its backlog more than doubled in the second quarter to a "record" level.
Cisco's adjusted gross margin for products, services, and total revenue declined year-over-year but increased sequentially.
The year-over-year decline was primarily due to higher component costs and supply chain constraints. Cisco expects these pressures to drive adjusted gross margin down to about 64% in the third quarter but stabilize at 64%-65% in the second half of the year.
It's not a perfect situation, but Cisco just approved another $15 billion in stock buybacks -- boosting the buyback to $18 billion -- to soften the blow. The company also increased its quarterly dividend by a penny to $0.38 per share, marking its 12th dividend increase and raising its projected yield to 2.7%.
Cisco expects third-quarter adjusted earnings per share to grow 2%-5% year over year and 6%-7% for the full year. That's also in line with the investor day target of 5%-7% annualized EPS growth from 2021 to 2025.
Cisco's stock is trading at 16 times its forward earnings. Its business is big and boring, but it is consistently profitable, its growth is stable, and it brings a lot of cash. That stability should make Cisco stock an attractive buy, as rising interest rates cause a retreat into income-producing stocks.
As long as the price is above 54.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 56.24
- Take Profit 1: 59.00
- Take Profit 2: 62.00
Alternative scenario:
If the level of 54.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 54.00
- Take profit 1: 52.00
- Take Profit 2: 50.00
