Technology

As Analysts Chase Cisco Targets Much Higher, $40 Looks Like Next Hurdle at Decade Highs

Jon C. Ogg

Published: November 16, 2017 10:55 am

Last Updated: January 12, 2020 6:14 am

Cisco Systems Inc. (NASDAQ: CSCO) surged higher after earnings and deferred revenues were solid. Cisco closed at $34.11 ahead of earnings, and it was trading up 6.4% at $36.30 on Thursday morning. It did not even take an hour for Cisco’s trading volume to go over 20 million shares, which is just over a full day’s normal trading volume. After many analysts have raised their price targets on Cisco, it appears, with a further help from the bull market, that Cisco may continue hitting 15-plus-year highs, with the stock set to challenge $40 in 2018.

24/7 Wall St. has already covered Cisco’s earnings in depth, but management is calling for earnings to be in the range of $0.58 to $0.60 per share and revenue growth between 1% and 3%. The consensus estimates call for $0.58 in EPS and $11.7 billion in revenue for the current quarter. This breaks the declining revenues streak that has been in place.

While Cisco’s Infrastructure Platforms revenue was down 4% with weakness in routing, wireless was strong and there was an uptake in the HyperFlex data center offering. Also, Cisco’s Applications revenue was up 6% with some help from AppDynamics, and security sales were up 8% with more subscription-based solutions being sold. Cisco also noted that its forward guidance did not include benefits from Broadsoft.

Deferred revenue came out to $18.6 billion, up 10% in total, with deferred product revenue up 16%, driven largely by subscription-based and software offers, and deferred service revenue was up 5%. The portion of product deferred revenue related to recurring software and subscription offers increased 37%.

Cisco has been transforming its business in recent years, away from just selling communications infrastructure equipment and services, moving toward adding newer products and services with subscription models. That deferred revenue shows how much it has been changing.

Jefferies reiterated its Buy rating on Cisco and raised its target to $40 from $37. Jefferies said:

This was a breakout quarter for Cisco. The print, guidance, and the narrative around the business were significantly better than many investors expected. Impressively, they’re now guiding for top-line growth in January. We continue to like the risk/reward in the name.

Merrill Lynch maintained its Neutral rating, but the price objective was raised to $37 from $35 in the call. The firm’s report noted:

Cisco reported solid first quarter results and issued better than expected second revenue and earnings guidance; second quarter revenue is expected to be up roughly 2%. New campus switching traction and Wifi helped offset weak routing; Applications growth helped by collaboration, AppDynamics. Still, guidance was only 1% better versus estimates and year over year growth is on easy comps; weak SP and product trends persist; reiterate Neutral.

Oppenheimer reiterated its Outperform rating and raised its target price to $40 from $36. Oppenheimer’s view is that Cisco’s vision is finally resonating with its customers. The firm’s report noted:

The quarter offered a number of positive data points (campus switching, security, AppD, etc.) that should leave investors confident that Cisco is on the right track. While near-term upside is possible, the business model shift should drive greater long-term economic upside to Cisco. Meanwhile, share repurchases/dividend yield (3.4%) should keep investors engaged while tax reform remains a wild card.

More reiterated ratings and price target hikes in Cisco were seen as follows:

• Barclays to $37 from $34
• Bernstein to $40 from $38
• BMO Capital Markets to $36 from $32
• Citigroup to $40 from $36‍​
• Deutsche Bank to $45 from $40
• FBN Securities to $40 from $35
• KeyBanc Capital Markets to $39 from $33
• Piper Jaffray to $37 from $36
• RBC Capital Markets to $40 from $36

What investors need to understand now is that Cisco is at highs not seen since the tech bubble burst back in 2000 to 2001. Based on how many other old tech stocks have broken out (Intel, Microsoft), many investors are likely to feel like Cisco shares should head much higher, perhaps even well above $40.

And Cisco remains “cheap” compared to some other technology giants based on its valuation. Even after the post-earnings pop, Cisco is valued at just under 15 times 2018 earnings and at about 14 times expected 2019 earnings. Cisco also has a 3.2% dividend yield. It also has paid out close to $5 per share in dividends since 2011 alone.

Cisco’s consensus analyst price target was $35.73 ahead of Wednesday’s earnings results, and that will rise further but was shown to be up at $38.57 on Thursday morning after all of these target price hikes.

Also worth noting is that Cisco’s 52-week trading range before earnings was $29.12 to $34.75. Its new 52-week high is $36.67.