Cisco’s First-Quarter Upside Bodes Well for Outlook; Stock Looks Attractive
We’re maintaining $54 fair value estimate for Cisco stock as we expect demand to stay healthy.
We maintain our $54 fair value estimate for wide-moat Cisco Systems (CSCO) after it reported fiscal first-quarter results modestly above our expectations. Cisco also raised its fiscal year top-line guidance slightly. We see strong fiscal 2023 performance for Cisco as a function of improving supply and demand dynamics: demand, while normalizing, remains strong for enterprise software and networking equipment, and supply is improving. We expect demand to stay healthy in fiscal 2023, and Cisco’s backlog, growing recurring revenue base, and remaining performance obligations give us confidence in fiscal 2023 results. We continue to view shares as undervalued.
Fiscal first-quarter sales rose 6% year over year and 4% sequentially to $13.6 billion. Enterprise networking and cybersecurity fueled growth. We’re pleased to see enduring networking demand, which we view as a prioritization of customers on critical infrastructure spending despite budget tightening elsewhere. We also view Cisco’s security growth (8% year over year) reflecting renewed investment to compete with pure-play firewall competitors. Secular declines in routing continue to weigh on the internet for the future segment, but Cisco reported its eighth straight quarter of double-digit order growth at web-scale cloud customers, which we view as a long-term driver. We were disappointed by a 2% year-over-year decline for collaboration, but continue to expect renewed go-to-market investment to drive a positive inflection for products like Webex.
Non-GAAP gross and operating margins both dipped by more than 100 basis points year over year, and modestly declined sequentially. Despite marginal supply improvements, Cisco is navigating high component costs and logistics costs that weigh on margins. We expect margins to sequentially improve through fiscal 2023—but stay below our estimates of midcycle—as Cisco’s pricing increases take effect and it works down its backlog.
William Kerwin does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.