Is Cisco Stock A Buy After Q2 Earnings?

Note: Cisco’s FY 2024 ended July 27, 2024

Cisco Systems Inc (NASDAQ: CSCO), a company providing networking equipment, security, collaboration, and cloud management services, is up 6% year-to-date compared to a 3% growth in the S&P 500 index (as of Jan. 12). In comparison, CSCO’s peer Alphabet stock (NASDAQ: GOOG) has seen its stock down 3% during the same period. The company’s Q2 (ended Jan. 25) results, announced on February 12th, exceeded analyst estimates on both the top and bottom lines. CSCO reported $14 billion in revenue in the fiscal second quarter, representing a 9% increase year-over-year (y-o-y). After a streak of four consecutive quarters of declining revenue, the company bounced back with a notable resurgence in fiscal Q2. A key driver of this growth was a significant influx of orders for artificial intelligence infrastructure, which topped $350 million in the quarter alone. The company’s net income for the latest quarter declined 8% y-o-y to $2.43 billion, or $0.61 per share. On a non-GAAP basis, EPS was $0.94, an increase of 8%.

Looking ahead, Cisco raised its full-year revenue forecast to between $56 billion and $56.5 billion from a prior estimate of $55.3 billion to $56.3 billion. It now anticipates adjusted earnings per share of $3.68 to $3.74, up from $3.60 to $3.66 previously. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked over 91% returns since inception.

Cisco’s fiscal first-half performance was mixed, with security revenues doubling y-o-y and networking revenues declining by 14%. While product revenue remained flat, service revenue increased by 6% y-o-y, reflecting the industry’s shift toward service-centric solutions. Cisco’s acquisition of Splunk in March 2024 for $27 billion marked a significant milestone in the company’s strategy to expand its security offerings. This move aligns with Cisco’s broader goal to enhance its AI-driven threat detection and response capabilities. The acquisition has already begun to bear fruit, with Splunk contributing positively to Cisco’s revenue. In fact, Cisco’s total revenue would have declined by 1% y-o-y without Splunk’s contribution. Furthermore, Splunk has been accretive to Cisco’s adjusted earnings per share sooner than expected. Splunk’s software solutions, which leverage artificial intelligence to analyze log files and other data, have been instrumental in helping companies minimize cybersecurity risks. Cisco plans to cross-sell Splunk products to its existing customer base, with approximately 5,000 customers identified as potential targets.

Cisco has also been making progress with gross margins in recent quarters, driven by lower freight and component costs, a favorable product mix, and overall better cost management. On a GAAP basis, CSCO’s total gross margin, product gross margin, and services gross margin were 65.1%, 63.7%, and 68.9%, respectively, as compared with 64.2%, 62.7%, and 68.2%, respectively, in the second quarter of fiscal 2024. We could see similar trends over Q3 as well. The company has been increasingly pushing toward a recurring revenue model with its software subscriptions and service contracts which could also help margins.

The increase in CSCO stock over the last 4-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 46% in 2021, -22% in 2022, 9% in 2023, and 22% in 2024. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

We have revised Cisco Valuation to $65 per share, based on a $3.70 expected EPS and a 17.6x P/E multiple for the fiscal year 2025. That said, the company’s valuation is almost in line with the current market price (as of Jan 12). Also, check out our analysis of Cisco Revenue for more details on the company’s key revenue streams.

[1] Returns as of 2/13/2025
[2] Cumulative total returns since the end of 2016

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