Cisco Systems: The Only AI Stock Income Investors Need to Own

Cisco Systems (NASDAQ: CSCO) is a sleeper-win among AI stocks and perhaps the only AI stock income investors need to own. This bluer-than-blue blue chip tech stock has secular tailwinds to drive growth, cash flow, capital returns, dividends, distribution growth, and share buybacks to support its stock price over time.

It's an AI winner because it is critical to enterprise and web-level networks globally and fundamental to the AI-capable hardware revolution.

The remainder of its businesses, which include cybersecurity and systems optimization, are also healthy and promise to remain strong for the foreseeable future. 

Cisco’s Beat-and-Raise Quarter Sets Stock Up to Hit Fresh Highs

Cisco’s FQ4 was solid, with revenue growing by 7.6% to $14.67 billion. The growth outpaced the consensus estimates by a slim margin, driven by growth in all geographies underpinned by AI. Segmentally, product orders grew by 7% and were offset by a flat result in Services.

Geographically, the Americas were strongest at +9%, followed by a 7% increase in APJC and 4% increase in EMEA. Regarding end markets, the Networking business, which comprises the components critical to AI infrastructure, grew by 12% while Security, another robust tech market, grew by 9%, Observability by 4%, and Collaboration by 2%. 

The margin news is also good, supporting the outlook for cash flow and capital returns. The company improved its adjusted net income margin by nearly 175 basis points to drive accelerated bottom-line growth. The net result is that adjusted EPS grew by 14%, almost double the top-line pace, and margins are expected to remain strong in the upcoming fiscal year. 

The guidance is a primary factor in why this stock will hit new highs. The company guided for additional growth and issued a forecast for Q1 and the full year that outpaces MarketBeat’s reported consensus by a significant margin on both the top and bottom lines. Based on industry trends, including Cisco’s AI infrastructure orders, which are more than doubling expectations, the guidance is likely to be viewed as cautious once the results are reported. 

Cisco’s Capital Return: Solid Infrastructure for Income Portfolios

Cisco’s capital return is robust, including a dividend that annualizes to more than 2% as of mid-August and aggressive share buybacks that reduced the count.

The Q4 activity resulted in a 1% year-over-year decline, bringing the full-year total to approximately 1.5%.

The pace of buybacks is expected to continue due to the $14.2 billion left under the current authorization, the cash flow, and the balance sheet. 

The balance sheet details highlight the company’s strength, with asset declines and debt increases offset by cash increases and liability reduction.

The takeaway is that Cisco’s equity is rising, up 3.6% for the year, and will continue to improve over time. 

Regarding balance sheet health, long-term debt is less than three times the cash and 0.5 times the equity, leaving it in a fortress condition. 

Cisco’s Analysts Trends Are Leading This Market to a Fresh All-Time High

Cisco’s bullish analyst trends are unlikely to end in its fiscal first quarter and may strengthen as the year progresses. The analyst trends reveal that coverage is rising, the sentiment is firming, the Moderate Buy rating has a bullish bias, and the price target is increasing.

Although the consensus aligns with the mid-August highs, the revision trend is upward, providing support for the market. The recent revisions have led to the high-end range, sufficient for a fresh long-term high approaching record levels. 

Assuming that the analysts’ trends remain bullish, Cisco Systems could make a very bullish move and break above the DotCom highs.

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The article "Cisco Systems: The Only AI Stock Income Investors Need to Own" first appeared on MarketBeat.