Cisco Systems Upgraded on AI Potential: Analysts See Larger Opportunity in Ethernet Switching Market

Cisco Systems upgraded to "Buy" at Citi as analysts see larger AI opportunity By Investing.com

Investing.com -- Analysts at Citi have upgraded their rating of Cisco Systems (NASDAQ:CSCO) to "Buy" from "Neutral", citing a larger potential impact from the network equipment maker's artificial intelligence operations. In a note to clients on Wednesday, the analysts said that although AI currently only accounts for roughly 2% of Cisco's revenues, the company is tipped to see a boost from expected growth in the use of ethernet switches in connecting AI-focused graphics processing units. Cisco is a key supplier of ethernet switches, which connect devices like computers, laptops, routers and servers with a local area network. The Citi analysts said they now estimate that ethernet will garner a "high-40s percentage" share of the roughly $10 billion AI switching market, up from their prior projection in the "low 40s percentage". The AI switching market is then anticipated to expand "more rapidly" in 2026, with ethernet's share of it increasing to more than half. Cisco has estimated that it will receive an additional $1 billion in AI orders in its current fiscal year, while ethernet adoption is due to partly fuel a jump in its hyperscaler AI segment to $9 billion by 2027. This forecast has also likely expanded, the Citi analysts said. "We see more AI benefiting Cisco's topline as well as the valuation gap [versus] networking peers," the Citi analysts wrote. They valued Cisco at 16 times its forward 2026 earnings per share, up from their prior multiple of 15 times forward earnings. The analysts argued that, due in part to Cisco's AI opportunities, the shares "warrant less of a discount" to its networking peers that trade at multiples of roughly 25 times forward earnings. Shares in Cisco rose in premarket US trading on Wednesday. In August, the group said it was seeing a rebound in demand for networking equipment and unveiled a plan to slash headcount to focus on high-growth areas such as AI and cybersecurity.

Cisco stock upgraded on AI potential and narrowing peer discount, says Citi By Investing.com

On Wednesday, Cisco Systems Inc. (NASDAQ:CSCO) stock received a favorable update from Citi, with the firm's analyst upgrading the stock from Neutral to Buy. Accompanying the upgrade is an increased price target, now set at $62.00, up from the previous $52.00. This adjustment reflects the analyst's expectation of Cisco benefiting from growth in the Ethernet AI Total Addressable Market (TAM) and a shrinking valuation gap compared to its peers. The analyst noted that while artificial intelligence (AI) represents a small portion of Cisco's business -- approximately 2% of revenue -- there is potential for a more significant contribution in the future. The optimism is partly based on the anticipation of more AI developments, which could lead to a more positive outlook for the networking equipment sector. As a result, investors might shift their focus from semiconductors and hardware to networking equipment, potentially enhancing the group's valuation. Citi has also revised its earnings per share (EPS) estimates for Cisco for fiscal years 2025 and 2026, increasing them by 2% and 5%, respectively. The new price target of $62.00 is based on a 16x price-to-earnings (P/E) multiple, which is still notably below the peer average of approximately 25x. This discount takes into account ongoing concerns over core market share losses, which are partially mitigated by the emerging AI opportunity. The analyst suggests that with the expected sales trough in July-Quarter and fiscal year 2024, there is limited potential for further downside. The upcoming October-Quarter results, to be reported on November 13, are seen as a potential catalyst for the stock. In other recent news, Cisco Systems Inc. has been on the radar with multiple developments. The company reported Q4 2024 revenue of $13.6 billion, a decline of 10% year-over-year. Despite a decrease in product revenue, significant growth was seen in the Security and Observability sectors, surging by 81% and 41% respectively. The company's acquisition of Splunk (NASDAQ:SPLK) added $960 million to the quarter's revenue. Cisco's transformation into a recurring revenue company was highlighted by Tigress Financial Partners, who maintained a Buy rating and increased the price target to $78. The firm anticipates this shift to enhance Return on Capital and Economic Profit. Cisco's significant investment in cloud services provider, Coreweave, valued at $23 billion, further emphasizes the company's intent to broaden its presence in the rapidly evolving sector. HSBC (LON:HSBA) upgraded Cisco's stock from Hold to Buy, reflecting positive expectations for the company's future performance. The firm anticipates a compound annual growth rate of 11.6% in Cisco's non-GAAP earnings per share from 2024 through 2027. Other analyst firms, including KeyBanc, BofA Securities, and Piper Sandler maintained their ratings, noting positive trends in the company's orders and advancements in artificial intelligence and security business. Additionally, there's been a notable change in the company's board of directors as Ekta Singh-Bushell will not seek re-election at the forthcoming annual stockholders meeting. Lastly, for the fiscal year 2025, Cisco's revenue is expected to fall between $55 billion and $56.2 billion. These are all recent developments within the company. Cisco's recent upgrade by Citi aligns with several key metrics and insights from InvestingPro. The company's market cap of $215.82 billion USD reflects its significant position in the Communications Equipment industry, which is further supported by an InvestingPro Tip highlighting Cisco as a prominent player in this sector. The analyst's optimism about Cisco's future earnings potential is reinforced by InvestingPro data showing a P/E Ratio (Adjusted) of 19.29 for the last twelve months, which is lower than the current P/E Ratio of 21.21. This suggests potential for valuation expansion, especially if the company capitalizes on the growing AI market as predicted. Additionally, an InvestingPro Tip notes that 15 analysts have revised their earnings upwards for the upcoming period, aligning with Citi's increased EPS estimates for fiscal years 2025 and 2026. The company's solid financial position is further evidenced by its consistent dividend payments, with an InvestingPro Tip revealing that Cisco has raised its dividend for 14 consecutive years. For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips that could provide valuable insights into Cisco's market position and future prospects.

Citi upgrades Cisco Systems, says Wall Street is underestimating AI tailwinds

Don't overlook the artificial intelligence potential of Cisco Systems , Citi said. Analyst Atif Malik upgraded shares of the networking company to buy from neutral, citing a shrinking valuation gap relative to peers and a growing AI ethernet total addressable market poised to hit $10 billion by 2025. "While AI is currently a small piece of the biz (~2% of revs), we see the potential for a stronger contribution," he wrote. "With more AI coming, we are incrementally more constructive on the group and expect continued investor rotation out of semis/hardware into networking equipment to benefit group valuation." Shares added 1.7% before the bell and looked poised to build on their 7% year-to-date gain. Malik lifted the firm's price target to $62 from $52 a share, reflecting about 15% upside from Tuesday's close. The analyst views the addition of the company's products in Meta Platforms' AI hardware as a potential boon and "positive validation of CSCO's technology." At least three major hyperscalers have already begun using the company's tools in backend networks, and Malik views Cisco's recent $9 billion 2027 hyperscaler AI opportunity forecast as potentially understated. CSCO YTD mountain Shares this year Malik also raised his EPS estimates for 2025 and 2026 by by 2% and 5%, respectively. "We believe shares warrant a sizable discount to networking peer valuation to reflect lingering share loss concerns, somewhat tempered by growing AI opportunities," he wrote. "Even at a 30+% discounted target multiple to peer average, we see meaningful upside to shares."

Why Cisco Systems Stock Zoomed More Than 4% Higher Today | The Motley Fool

Artificial intelligence will be a key factor driving the company's fundamentals higher, one researcher believes. An analyst recommendation upgrade was the news propelling the stock of Cisco Systems (CSCO 4.25%) skyward on Wednesday. Investors took the bullish new rating to heart, pushing into shares of the veteran computer networking company and sending them more than 4% higher in price. That performance was much better than the 0.5% rise of the S&P 500 index that day. Well before market open, Atif Malik of Citigroup changed his Cisco stock recommendation to buy from the previous neutral. In doing so he also pulled the lever on a significant price target increase, raising his to $62 per share from the preceding $52. Malik sees vast scope for improvement in the high-demand field of artificial intelligence (AI), particularly considering that it's only responsible for around 2% of Cisco's overall revenue. As the company specializes in the ethernet switches that facilitate computer networks, it stands to benefit handsomely from the need to connect graphics processing units (GPUs) powerful enough to traffic AI functionalities to other hardware. The analyst also pointed to Cisco stock's low valuations compared to other peers in the networking segment. "With more AI coming, we are incrementally more constructive on the group and expect continued investor rotation out of semis/hardware into networking equipment to benefit group valuation," Malik wrote in his latest Cisco research note. In many ways, Cisco is seen as a stodgy tech company peddling ho-hum technology that was only exciting years (or even decades) ago. So there's definitely a sleeper quality to the stock. Malik might very well be onto something here.