Multi-faceted technology giant Cisco (NASDAQ:CSCO) recently reported fourth quarter numbers that were quite good and Cisco stock traded mildly higher on the news.

It was a double beat quarter with a healthy guide, and featured the best revenue growth the company has seen in years, proof that Cisco’s top-line growth narrative is steadily improving thanks to increased traction in secular growth markets like cloud and cybersecurity.

But, Cisco didn’t bounce big or shoot to new all-time highs. While the Q4 report was good on the top-line, it also pointed to continued weakness in margins. Specifically, higher component costs are outweighing higher product prices, and gross margins are dropping. This slide in gross margins is expected to continue.

Over time, component costs will come down, and gross margins will head higher. That inflection should happen sooner rather than later.

But, even if gross margins do head higher over the next five years, I don’t really think Cisco stock will be a big winner from present levels. At best, I think this stock trends towards $50 over the next twelve months, implying limited upside from today’s $45 price tag.

Cisco’s Quarter Was Solid, but Not Great

Cisco’s fourth quarter report was excellent on the revenue side, and not-so-great on the earnings side of things, leading to an overall solid, but not great, report.

Revenue growth came in at 6%. That is exceptionally healthy growth for this historically low growth and even negative growth company. Indeed, the fourth quarter’s 6% revenue growth rate is the best mark this company has posted in years.

Robust revenue growth is expected to continue. In the first quarter of 2019, revenue growth is expected to be 6% at the midpoint.

Clearly, the company is gaining traction where it matters. Cisco has always had exposure to secular growth markets like cloud, cybersecurity, and IoT.

Unfortunately, those businesses for Cisco have had trouble gaining traction and were largely offset by declines in the legacy businesses. That is no longer the case. Cisco is making huge gains in cloud and cybersecurity, and as a result, top-line growth is back.

It is here to stay, too, because the cloud and cybersecurity macro-tailwinds will last a lot longer.

But, all that revenue growth didn’t flow entirely to the bottom line. Instead, a lot of it was eaten up by lower gross margins, which fell due to higher component costs. The operating expense rate did fall and offset some gross margin compression, but not all of it. As such, 6% revenue growth in Q4 turned into 4% operating profit growth.

In total, Cisco’s quarter was good, but not great. Revenue growth is clearly back and here to stay. But, margins remain a near-term concern, and profit growth will remain muted so long as margins keep falling.

Cisco Stock Is Solid, but Not Great

Much like the fourth quarter report, Cisco looks good, but it doesn’t look great.

Specifically, Cisco stock doesn’t look that promising over the next twelve months. Cisco’s renewed revenue growth is here to stay. But, the Q1 guide calling for 6% revenue growth laps a 2% decline in the year ago quarter.

The laps only get tougher as the year progresses, so revenue growth will likely cool off the further we get into fiscal 2019.

Slowing revenue growth isn’t exactly a driver of strong share price performance, especially when Cisco is simultaneously dealing with margin headwinds. Thus, if component costs don’t come down in fiscal 2019, then Cisco could be looking at revenue growth deceleration and margin compression in the back-half of 2019, which could weaken the stock.

From a fundamental standpoint, Cisco is a company which can leverage exposure to cloud and cybersecurity to grow revenues at a low to mid single digit rate over the next several years.

Component costs will eventually come down, and gross margins will eventually go back up. Positive revenue growth should drive some operating expense leverage. And, buybacks will boost earnings growth.

Under the above assumptions, I reasonably see Cisco as having $4 earnings per share potential by fiscal 2023 (five years). A market-average 16X forward multiple on that implies a fiscal 2022 price target of $64. Discounted back by 10% per year, that equates to a fiscal 2019 price target of $48.

Bottom Line on Cisco Stock

Things are getting better at Cisco. But, Cisco stock has already shot higher concurrent to improvements in the growth narrative. Further gains seem limited in the near to medium terms, considering that revenue growth will likely slow in fiscal 2019 and that margins remain under pressure.

As such, while I think Cisco stock will head higher over the next twelve months, I also think that such gains will be greatly limited.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.