Cisco Earnings: Still Like Long-Term Opportunity Despite Lowered Outlook

Key Morningstar Metrics for Cisco Systems

• Fair Value Estimate: $53.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Cisco Systems’ Earnings

We’ve trimmed our fair value estimate for Cisco Systems CSCO to $53 per share from $56 after the firm reported impressive fiscal first-quarter results but provided poor guidance for the rest of the fiscal year. Cisco’s January-quarter guidance implies a 13% sequential sales decline, and management lowered its outlook for fiscal 2024 sales by roughly 5%.

Management attributed the lowered expectations to large enterprises working to implement previously delivered Cisco equipment before resuming orders. We now see fiscal 2024 as more of a correction year. Tremendous fiscal 2023 results were driven by backlog reductions buoying sales above end demand, which looks weaker than we previously believed it would be.

Zooming out, we continue to see a 3% medium-term growth rate as reasonable for Cisco and note that the midpoint of revised fiscal 2024 sales guidance still implies 3% compound annual growth from fiscal 2021, inclusive of a supernormal fiscal 2023 followed by the current correction. With shares down roughly 10% after hours in reaction to guidance, we now see Cisco stock trading at a modest discount to our updated fair value estimate. We continue to like the company’s moat, profitability, and shareholder returns for long-term investors, in spite of current weakness.

Fiscal first-quarter sales rose 8% year over year to meet our expectations, and every profit metric exceeded our expectations. Networking sales drove top-line strength, rising 10% year over year. Impressive non-GAAP gross margin of 67% was helped by continued backlog reduction of high-margin products and filtered down through to the bottom line.

January-quarter guidance includes $12.7 billion in sales at the midpoint, down 7% year over year and 13% sequentially. Cisco is also calling for more than 400 basis points of sequential non-GAAP operating margin compression to 32%, primarily behind weaker volumes.