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The No.1 Tech Stock to Buy in 2023

Leading digital communications technology company Cisco’s (CSCO) shares have been gaining in price despite the lingering macroeconomic issues. The stock should sustain its momentum supported by its solid fundamentals. Moreover, the company pays reliable dividends. So, CSCO could be the ideal stock to own in 2023. Read on…

While the stubbornly high inflation and the Fed’s commitment to tame it with interest rate hikes have rattled the stock market, taking a heavy toll on tech stocks, Cisco Systems, Inc. (CSCO) has fared relatively well. Its strong fundamental positioning has helped the stock sustain gains despite the macroeconomic headwinds.

The stock has gained 13.3% over the past six months and 3% year-to-date, closing the last trading session at $49.06. Moreover, it is trading above its 50-day and 200-day moving averages of $48.41 and $45.71, respectively, indicating an uptrend. I think the stock is well poised to maintain its momentum for the reasons I mentioned throughout this article.

The company reported impressive results for the most recent quarter. Also, CSCO raised its full-year outlook citing its growing recurring revenue base and RPO, its healthy backlog, and the steps taken to improve supply.

Its revenue is expected to grow 9% to 10.5% year-over-year in the fiscal year 2023, while its non-GAAP EPS is expected to be in the range of $3.73 to $3.78.

The tech icon is constantly evolving with new partnerships and innovation. “The modern, highly secure networks we are building serve as the backbone of our customers’ technology strategy. This, combined with the success of our ongoing business transformation and operational discipline gives me confidence in our future,” said Chuck Robbins, chair and CEO of Cisco.

Cisco Unveiled some promising 5G and IoT innovations at the Mobile World Congress 2023.

CSCO and T-Mobile US, Inc. (TMUS) announced plans to offer businesses Cisco Meraki’s first-ever 5G cellular gateways for fixed wireless access (FWA), the MG51 and MG51E. The Cisco Meraki MG51 and MG51E cellular gateways introduce a new, 5G-powered, cloud-first way of doing wide area networking (WAN).

Also, CSCO announced its collaboration with Mercedes-Benz to provide an optimal mobile office experience in its new Mercedes-Benz E-Class vehicles. These vehicles will be equipped with Webex Meetings and Calling and utilize Webex AI audio capabilities to enable greater flexibility for the hybrid workforce.

In this era of 5G and hybrid work, these innovations are expected to boost CSCO’s prospects.

Let’s look at the factors that make CSCO an ideal buy in 2023:

Solid Financials

For the fiscal second quarter that ended January 28, 2023, total revenue increased 6.9% year-over-year to $13.59 billion, while its non-GAAP operating income was $4.40 billion, up 1% year-over-year. Total annualized recurring revenue (ARR) came in at $23.30 billion, up 6% year-over-year, and product ARR was up 11% year-over-year.

The company’s non-GAAP net income increased 2.6% year-over-year to $3.64 billion, and its non-GAAP EPS grew 4.8% from the year-ago value to $0.88. Also, cash flow from operating activities stood at $4.70 billion for the quarter, an increase of 93% compared with $2.50 billion for the second quarter of fiscal 2022.

Impressive Dividend Paying History

CSCO has a record of 11 years of consecutive dividend growth. CSCO has declared a quarterly dividend of $0.39 per common share, up 3% over the previous quarter’s dividend. It is scheduled to be paid on April 26, 2023, to all stockholders of record as of the close of business on April 5, 2023.

Its annual dividend of $1.56 per share yields 3.18% on the current price. Its four-year average dividend yield is 3.00%. The company’s dividend payouts have grown at a 2.8% CAGR over the past three years and a 5.6% CAGR over the past five years.

High Profitability

CSCO’s trailing-12-month EBIT margin of 26.58% is 348.5% higher than the industry average of 5.93%, while its trailing-12-month EBITDA margin of 29.74% is 165.1% higher than the industry average of 11.22%. Also, its trailing-12-month net income margin of 21.26% is substantially higher than the industry average of 2.92%.

In addition, CSCO’s trailing-12-month ROCE, ROTC, and ROTA of 27.92%, 17.06%, and 11.79% compare with the industry averages of 4.87%, 3.19%, and 1.55%, respectively.

Favorable Growth Expectation

Analysts expect the company’s revenue to increase 11.9% year-over-year to $14.36 billion in the fiscal quarter ending April 2023. Its EPS is expected to come in at $0.97, up 11.3% year-over-year. CSCO’s revenue is expected to grow 14.1% in the quarter ending July 2023 and 7.1% in the following quarter, while its EPS is expected to grow 24.7% and 14%, respectively.

Street expects CSCO’s revenue to come in at $56.57 billion in the ongoing fiscal year, indicating an increase of 9.7% from the prior year. Its EPS is expected to rise 11.8% year-over-year to $3.75 in the same period.

POWR Ratings Show Promise

CSCO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCO has an A grade for Quality, in sync with its higher-than-industry profit margins.

CSCO has a B grade for Sentiment, in sync with optimistic analyst estimates.

CSCO is ranked #3 out of 50 stocks in the B-rated Technology – Communication/Networking industry.

Click here to see the other ratings of CSCO for Growth, Value, Stability, and Momentum.

View all top stocks in the Technology – Communication/Networking industry here.

Bottom Line

CSCO’s innovations and new launches are helping the company strengthen its position in the digital communications technology space. Moreover, as the cloud computing market is growing, CSCO is expected to benefit. The stock has advanced over the past months despite the widespread recession worries. Furthermore, Wall Street analysts see an upside potential of 15.9% in the stock.

CSCO could be the right stock to own now, considering its robust fundamentals and impressive dividend-paying record.

How Does Cisco Systems, Inc. (CSCO) Stack up Against Its Peers?

While CSCO has an overall POWR Rating of A, investors could also consider looking at its A-rated industry peers: PC-Tel, Inc. (PCTI), Extreme Networks, Inc. (EXTR), and AudioCodes Ltd. (AUDC).

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CSCO shares were trading at $49.86 per share on Thursday morning, up $0.80 (+1.63%). Year-to-date, CSCO has gained 5.50%, versus a 2.78% rise in the benchmark S&P 500 index during the same period.



About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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