Note: Cisco’s fiscal year 2024 ended on July 27, 2024.
Cisco Systems Inc (NASDAQ: CSCO), a company specializing in networking equipment, security, collaboration, and cloud management services, has seen its stock rise 6% year-to-date, compared to the S&P 500 index’s 3% growth as of January 12. In contrast, CSCO’s competitor, Alphabet (NASDAQ: GOOG), experienced a 3% decline in the same period. Separately, check out: HubSpot Stock At $840 – Is the Price Justified?
Cisco’s Q2 earnings for the period ending January 25, released on February 12, surpassed analyst expectations on both revenue and profit. The company reported $14 billion in revenue, marking a 9% year-over-year (y-o-y) increase. This performance ended a four-quarter streak of revenue declines, with growth largely driven by a surge in AI infrastructure orders, which amounted to over $350 million during the quarter. Despite this revenue boost, net income fell 8% y-o-y to $2.43 billion, or $0.61 per share. On a non-GAAP basis, EPS increased by 8% to $0.94.
Looking ahead, Cisco raised its full-year revenue outlook to a range of $56 billion to $56.5 billion, up from its previous estimate of $55.3 billion to $56.3 billion. The company also increased its adjusted earnings per share forecast to between $3.68 and $3.74, compared to its earlier projection of $3.60 to $3.66. If you are looking for a portfolio with steady gains rather than investing in an individual stock, consider the High Quality portfolio, which has significantly outperformed the S&P 500, generating 100% returns since its inception.
Cisco’s fiscal first half saw mixed results, with security revenue doubling y-o-y, while networking revenue dropped by 14%. While product revenue remained stable, service revenue grew by 6% y-o-y, underscoring the industry’s shift towards service-based solutions. In March 2024, Cisco completed its $27 billion acquisition of Splunk, a move aimed at strengthening its security offerings. This acquisition aligns with Cisco’s strategy to enhance its AI-powered threat detection and response capabilities. Splunk has already contributed positively to Cisco’s revenue; without it, Cisco’s total revenue would have declined by 1% y-o-y. Additionally, Splunk has boosted Cisco’s adjusted EPS ahead of expectations. Its AI-driven software, which helps companies analyze log files and manage cybersecurity risks, will be cross-sold to around 5,000 existing Cisco customers identified as potential users.
Cisco has also improved its gross margins in recent quarters, benefiting from lower freight and component costs, a more favorable product mix, and overall cost efficiencies. On a GAAP basis, Cisco’s total gross margin, product gross margin, and services gross margin stood at 65.1%, 63.7%, and 68.9%, respectively, compared to 64.2%, 62.7%, and 68.2% in Q2 of fiscal 2024. Similar trends may continue in Q3. The company has also been shifting towards a recurring revenue model through software subscriptions and service contracts, which could further support margins.
CSCO stock has experienced volatile returns over the past four years, with performance varying significantly from year to year. It delivered a 46% gain in 2021, a 22% decline in 2022, a 9% increase in 2023, and a 22% gain in 2024. The Trefis High Quality Portfolio, which comprises 30 stocks, has exhibited much lower volatility while consistently outperforming the S&P 500. What sets it apart? This portfolio has delivered superior returns with reduced risk, offering a smoother ride than individual stock investments. You can see the difference in HQ Portfolio performance metrics.
We have revised our Cisco Valuation to $65 per share, based on an expected EPS of $3.70 and a P/E multiple of 17.6x for fiscal 2025. However, this valuation is roughly in line with the current market price as of January 12. You can also explore our detailed Cisco Revenue analysis for a closer look at its key revenue sources.
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