Cisco’s Superb Fiscal 2023 Reflects Networking Strength

Cisco Stock at a Glance

• Current Morningstar Fair Value Estimate: $56
• Stock Star Rating: 4 Stars
• Economic Moat Rating: Wide

Cisco Earnings Update

We raise our fair value estimate for Cisco Systems (CSCO) to $56 per share from $54, following a strong fiscal second quarter and terrific guidance for the remainder of the year. We view Cisco’s impressive guidance as reflecting both an improving supply environment and durably strong demand. Enterprise networking spending appears resilient to us against a backdrop of softening end markets elsewhere. We believe strong results so far in fiscal 2023 and strong guidance for the future lends credence to our long-term view that Cisco remains the pre-eminent heavyweight in enterprise networking. We see its moaty, holistic portfolio eliciting high switching costs for customers and prompting upselling, which could even allow it to claw back market share from competitors. Shares initially jumped 7% afterhours in response to guidance, but gave back some gains as we think investors grew skittish of the durability of growth. Though we see backlog drawdown as contributing to near-term growth, we view networking demand as strong into the long term. With shares trading around $50, we still see value for long-term investors.

Fiscal second-quarter sales rose 7% year over year to $13.6 billion. Growth was led by Cisco’s core networking business, and was broad-based across enterprise, cloud, and government customers. Management noted particular strength in wireless. Security and collaboration software posted weaker quarters, in our view due to wider pullbacks in software spending that we don’t see affecting Cisco’s core networking equipment.

Margins were once again down year over year, but improved nicely sequentially. Non-GAAP gross margin of 63.9% rose 90 basis points sequentially, with improving supply lifting away additional costs and higher-priced backlog items shipping for revenue. Non-GAAP operating margin of 32.5% rose 70 basis points sequentially, primarily behind gross margin expansion.