The runaway inflation led the Fed to hike interest rates this year aggressively. The central bank has implemented six interest rate hikes this year, with more in the offing.
The Fed’s aggressive monetary policy tightening has kept tech stocks under pressure. The tech-heavy Nasdaq composite has fallen 28.8% year-to-date. However, tech stock Cisco Systems (CSCO) has gained 14.4% in price over the past month to close the last trading session at $47.79.
The San Jose, California-based company CSCO designs and manufactures Internet Protocol-based networking and other communications and information technology-related products.
For the fiscal first quarter, CSCO surpassed the consensus revenue and EPS estimates. Its EPS came 2.9% higher than analyst estimates, and its revenue beat the consensus estimate by 2.6%. Its non-GAAP EPS of $0.86 was its second-highest quarterly non-GAAP EPS in history.
The company delivered its largest quarterly revenue in its history. Its annualized recurring revenue (ARR) rose 7% year-over-year to $23.20 billion, while its product ARR increased 12% year-over-year. Its total software revenue rose 5% year-over-year, and its software subscription revenue rose 11% year-over-year.
CSCO’s remaining performance obligations (RPO) rose 3% year-over-year to $30.90 billion, and product RPO increased 5% year-over-year.
Due to a significant rise in energy costs and market volatility in Europe, CSCO is witnessing increased cautiousness among European businesses. However, this has given the company an opportunity as its IoT, Silicon One, and power over ethernet technologies will help significantly reduce power consumption.
For fiscal 2023, the company raised its guidance for revenue growth from the previously expected range of 4%-6% to 4.5%-6.5% year-over-year. CSCO has also upped its non-GAAP EPS guidance by 4.5%-6.5% year-over-year to $3.51-$3.58.
CSCO Chair and CEO Chuck Robbins said, “These results demonstrate the relevance of our strategy, our differentiated innovation, and our unique position to help our customers become more resilient.” CSCO’s CFO, Scott Herren, said, “We delivered strong results in Q1 and continued to make progress on our business transformation.”
“This, together with our significant backlog, strong RPO, and easing supply situation, provides us with great visibility and predictability and supports our increased full-year guidance,” he added.
CSCO pays a $1.52 per share dividend annually, which translates to a 3.18% yield on the current share price. Its four-year dividend yield is 2.97%. The company’s dividend payouts have grown at a CAGR of 3.05% over the past three years and 5.97% over the past five years. It paid a quarterly dividend of $0.38 on October 26, 2022.
Wall Street analysts expect the stock to hit $54.50 in the near term, indicating a potential upside of 14%.
Here’s what could influence CSCO’s performance in the upcoming months:
Strategic Partnership
On October 12, 2022, CSCO and tech giant Microsoft Corporation (MSFT) announced their partnership where CSCO and MSFT Teams will be able to run natively on CSCO Room and Desk devices, and CSCO will be a partner in the Certified for MSFT Teams program in the first half of 2023.
Through this partnership, CSCO is helping drive interoperability and is meeting its customers’ needs.
Robust Financials
CSCO’s total revenue increased 5.7% year-over-year to $13.63 billion for the first quarter ended October 29, 2022. The company’s non-GAAP net income increased 2.1% year-over-year to $3.55 billion. Its non-GAAP EPS came in at $0.86, representing an increase of 4.9% year-over-year. In addition, its non-GAAP operating income increased 1.1% year-over-year to $4.33 billion.
Favorable Analyst Estimates
Analysts expect CSCO’s EPS for fiscal 2023 and 2024 to increase 5.5% and 8% year-over-year to $3.55 and $3.83, respectively. Its revenue for fiscal 2023 and 2024 is expected to increase 5.6% and 4.1% year-over-year to $54.46 billion and $56.67 billion, respectively. It has surpassed Street EPS estimates in each of the trailing four quarters.
Mixed Valuation
In terms of forward non-GAAP P/E, CSCO’s 13.48x is 29.3% lower than the 19.05x industry average. Likewise, its 10.40x forward EV/EBIT is 35.3% lower than the 16.08x industry average.
However, its 2.64x forward non-GAAP PEG is 70.4% higher than the 1.55x industry average. Also, its 3.60x forward P/S is 44.1% higher than the 2.50x industry average.
High Profitability
In terms of the trailing-12-month gross profit margin, CSCO’s 62.23% is 24.4% higher than the 50.04% industry average. Likewise, its 30.37% trailing-12-month EBITDA margin is 152.1% higher than the industry average of 12.05%. Furthermore, the stock’s 27.01% trailing-12-month EBIT margin is 322.1% higher than the industry average of 6.40%.
POWR Ratings Show Promise
CSCO has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCO has a C grade for Value, consistent with its mixed valuation.
It has an A grade for Quality, in sync with its high profitability. Its 0.98 beta justifies its B grade for Stability.
CSCO is ranked #3 out of 48 stocks in the Technology – Communication/Networking industry. Click here to access CSCO’s Growth, Momentum, and Sentiment ratings.
Bottom Line
CSCO is trading above its 50-day and 200-day moving averages of $42.95 and $47.40, respectively, indicating an uptrend. The company delivered impressive fiscal first-quarter results despite the macroeconomic and supply chain challenges.
When the tech industry is witnessing a slowdown, CSCO has upped its revenue growth guidance for the second quarter and fiscal 2023. Also, it expects strong growth in its non-GAAP EPS.
The company is witnessing solid demand across its segments. Given its robust financials, favorable analyst estimates, stable dividend yields, and high profitability, it could be wise to buy the stock now.
How Does Cisco Systems, Inc. (CSCO) Stack up Against Its Peers?
CSCO has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Technology – Communication/Networking industry with an A (Strong Buy) rating: Extreme Networks, Inc. (EXTR) and AudioCodes Ltd. (AUDC).
CSCO shares were trading at $47.86 per share on Monday morning, up $0.07 (+0.15%). Year-to-date, CSCO has declined -22.10%, versus a -16.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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