Cisco Earnings: Demand Coming Down to Earth but Still Healthy, in Our View

Cisco Stock at a Glance

• Fair Value Estimate: $56
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Cisco Earnings Update

We maintain our $56 fair value estimate for shares of wide-moat Cisco Systems CSCO after it topped its fiscal fourth-quarter guidance and provided an outlook for modest growth in fiscal 2024.

Underlying demand for Cisco’s core networking products is coming down to earth from record levels seen during fiscal 2022, but remains at a healthy level, in our view. A large order backlog helped Cisco to achieve supernormal growth in fiscal 2023, but we think fundamental demand can fuel stable growth into the long term after the backlog returns to normal levels in fiscal 2024.

We continue to see Cisco as a dominant force in enterprise networking, with highly sticky solutions that retain customers and underpin our wide Morningstar Economic Moat Rating. We see shares as fairly valued.

Fiscal fourth-quarter sales rose 16% year over year and 4% sequentially to $15.2 billion, above the top end of guidance. Cisco’s core networking business continued to drive growth, with the secure agile networks segment rising 33% year over year and 8% sequentially. Networking growth throughout fiscal 2023 was helped by Cisco working through an elevated backlog of orders that it was unable to fulfill in 2022 owing to supply constraints.

Though demand has softened from record levels, we see year-over-year declines for orders in the quarter reflecting a return to normal from the postpandemic surge, and not a reason for worry. Cloud customer demand remains soft, but makes up a small portion of Cisco’s overall results. Cisco’s cybersecurity posted lackluster growth once again, and the Webex-centric collaboration segment declined 12% year over year.

Cisco’s profitability was terrific in the quarter, with non-GAAP gross margin rising 260 basis points year over year to 65.9% and non-GAAP operating margin rising 300 basis points year over year to 35.4%. Both benefited from higher volumes and improved supply compared with a year ago.

Finally, Cisco discussed its ability to benefit from the recent surge in artificial intelligence spending. We remind investors that Cisco’s position in large cloud and AI customers is improving, but small. The firm declared $500 million in orders already received for its AI switching fabric, and discussed new products like its Silicon One chip line and 800-gigabit switches that should sell into AI applications. We like that Cisco is improving its position with cloud customers, but continue to view enterprise networks as its most important driver and see AI as a marginal driver at this time.