Tech stocks endured a challenging 2022 due to the Fed’s seven interest rate hikes. Over the past year, the tech-heavy Nasdaq Composite has declined 25.6%. San Jose, California- based tech major Cisco Systems, Inc. (CSCO) has gained 20.4% in price over the past three months and 14.5% over the past six months to close the last trading session at $48.88.
The stock’s outperformance can be attributed to its fiscal first-quarter results, where 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%.
CSCO’s 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.
CSCO’s software revenue in the first quarter rose 5% year-over-year, and its software subscription revenue rose 11% year-over-year. Its remaining performance obligations (RPO) rose 3% year-over-year to $30.90 billion, and product RPO increased 5% year-over-year.
Within product revenue, Secure, Agile Networks’ revenue rose 12% year-over-year to $6.68 billion, End-to-End Security increased 9% year-over-year to $971 million, and Optimized Application Experiences increased 7% from the prior-year quarter to $193 million.
On the other hand, Internet for the Future sales declined 5% year-over-year to $1.31 billion, while Collaboration revenue fell 2% from the prior-year period to $1.09 billion. Also, Other Products’ revenue decreased 47% year-over-year to $2 million. Services revenue was flat at $3.39 billion.
Post its first quarter earnings, 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.”
In November, CSCO announced that it would incur a $600 million pre-tax charge associated with layoffs and restructuring of its businesses to capitalize on growth opportunities, looking to strengthen its enterprise networking, security, and platform offerings. Earlier this month, CSCO announced the laying off of 700 jobs.
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. For the second quarter, the company expects its revenue to grow between 4.5% and 6.5% year-over-year and its non-GAAP EPS to come between $0.84 and $0.86.
CSCO’s Chief Financial Officer Scott Herren said, “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 3.11% yield on the current share price. Its four-year dividend yield is 2.98%. The company’s dividend payouts have grown at CAGRs of 2.78% and 5.55% over the past three and five years, respectively.
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 5.6% and 8.1% year-over-year to $3.55 and $3.84, respectively. Its revenue for fiscal 2023 and 2024 is expected to increase 5.7% and 4% year-over-year to $54.50 billion and $56.71 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 13.78x is 29.6% lower than the 19.57x industry average. Likewise, its 10.72x forward EV/EBIT is 36% lower than the 16.74x industry average.
However, its 2.70x forward non-GAAP PEG is 70.5% higher than the 1.58x industry average. Also, its 3.68x forward P/S is 34.6% higher than the 2.74x industry average.
High Profitability
In terms of the trailing-12-month gross profit margin, CSCO’s 62.23% is 25.7% higher than the 49.53% industry average. Likewise, its 30.34% trailing-12-month EBITDA margin is 160% higher than the industry average of 11.67%. Furthermore, the stock’s 26.97% trailing-12-month EBIT margin is 307.3% higher than the industry average of 6.62%.
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 0.97 beta justifies its B grade for Stability.
CSCO is ranked #4 out of 49 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 $47.47 and $46.11, respectively, indicating an uptrend. The company’s earnings and revenue beat analyst estimates in the first quarter. Moreover, the company has raised its guidance for fiscal 2023 on the back of easing supply chain constraints through fiscal 2023.
The company is witnessing solid demand across its segments, and its RPO (Remaining Performance Obligations) remains robust at nearly $31 billion. Therefore, given its robust financials, favorable analyst estimates, stable dividend payments, 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: PCTEL, Inc. (PCTI) and Extreme Networks, Inc. (EXTR).
CSCO shares were unchanged in premarket trading Monday. Year-to-date, CSCO has gained 3.42%, versus a 4.20% 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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