Network communications giant Cisco Systems (NASDAQ:CSCO) stock has finally been selling off despite strong top and bottom-line growth. The networking leader gained solid traction with its 400 gig solutions. Solid demand was spread across most of its portfolio, including SP routing, wireless, security, switching, and SD-WAN. The company experienced supply chain disruption related to components in addition to inflationary pressures in the quarter.
The Russian Ukraine conflict prompted the company to cease operations in Russia and Belarus and the China COVID lockdowns, which all lent to critical component shortages. All resulted in an earnings shortfall and lowered guidance. However, this hasn’t deterred demand, as evidenced by building up over $15 billion in the product backlog, up 130% from last year, as product ARR and RPO rose double-digits. The company implemented many initiatives, including price rises to mitigate inflationary headwinds, which should be more evident in the next fiscal year. Cisco shares trade at 13.6X forward earnings with a 3.3% dividend yield. Prudent investors looking for exposure to a networking leader to buy on the dips can watch for opportunistic pullbacks in shares of Cisco.
Q3 Fiscal 2022 Earnings Release
On May 18, 2022, Cisco reported its fiscal Q3 2022 results for the quarter ending April 2022. The company reported earnings-per-share (EPS) of $0.87 versus consensus analyst estimates for $0.86, a $0.01 beat. Revenues rose 0.2% year-over-year (YoY) to $12.84 billion, missing analyst estimates of $13.34 billion. Non-GAAP margins were 34.7% versus prior guidance of $32.5% to 33.5%. Cisco CEO Chuck Robbins commented,
"We continued to see solid demand for our technologies, and our business transformation is progressing well. While Covid lockdowns in China and the war in Ukraine impacted our revenue in the quarter, the fundamental drivers across our business are strong and we remain confident in the long term. We delivered healthy earnings despite unanticipated disruptions through strong pricing and disciplined spend management."
Cisco CFO Scott Herren added,
"Our product backlog is well over $15 billion and product ARR and RPO (remaining performance obligations) again grew double digits. The continued progress in our business model transformation reflects the success of our strategy and underpins our long-term confidence."
Downside Guidance
Cisco issued downside fiscal Q4 2022 EPS guidance in the range of $0.76 to $0.84 versus $0.92 consensus analyst estimates. The company expects a (-5.5%) to (-1%) decline in revenues between $12.4 billion to $13 billion versus $13.87 billion analyst estimates.
Conference Call Takeaways
CEO Robbins started by pointing out the factors leading to its shortfall and lowered guidance, including supply chain disruptions of critical components, China COVID lockdowns, and the Russian Ukraine conflict. This prevented the company from shipping products at anticipated initial levels in the quarter.
He believes the top line moving forward will depend largely on supply rather than demand, which is still robust. The company is taking action to mitigate the damage, and Cisco should see the benefits next year. He emphasized,
“The fundamental drivers across our business are strong. While we are facing some short-term challenges, it does not change our long-term outlook, our alignment to our customers' most critical challenges, or our belief in the tremendous opportunities in front of us.”
The backlog rose 131% YoY and up 10% sequentially to record levels above $15 billion. Cisco ended the quarter with over $30 billion in RPO.
CSCO Opportunistic Pullback Levels
Using the rifle charts on the weekly and daily frames provides a precision view of the landscape for CSCO stock. The weekly rifle chart peaked near the $50.46 Fibonacci (fib) level before collapsing on the fiscal Q3 2022 earnings reaction. The weekly 200-period moving average (MA) was broken at $49.17.
The weekly 5-period MA continues to fall at $46.57 but shares made a near-term bottom near the $41.18 fib to stage a rally. The weekly market structure low (MSL) buy triggers on the $45.64 breakout. The weekly lower Bollinger Bands (BBs) at $41.66. The weekly stochastic coiled back towards the critical 20-band.
The daily rifle chart is a make or break as the 5-period MA at $45.42 and 15-period MA at $45.69 form a tightening channel at of the breakout or inverse pup breakdown. The daily lower BBs sit at $39.71 and 50-period MA at $50.26. The daily stochastic is slowing down under the 50-band.
Prudent investors can look for opportunistic pullback levels at the $43.94 fib, $43.58 fib, $42.49 fib, $41.61 fib, $41.18 fib, $40.61 fib, $39.31 fib, $37.83 fib, and the $36.67 fib level. Upside trajectories range from the $50.49 fib up towards the $57.40 fib level.