Cisco on the Rise: AI Potential and Analyst Upgrades Drive Gains

Key Points

• Cisco is a legacy computer networking company that has only recently begun to expand into the AI space.
• Citigroup recently upgraded its rating and increased its price target for Cisco, betting that AI demand will drive growth into the future thanks to the company's leadership in the ethernet space.
• The firm also has strong fundamentals and appears to be undervalued compared to its rivals, while offering a strong dividend prospect for investors.

Cisco NASDAQ: CSCO, formerly known as Cisco Systems, is a computer networking firm that competes with Ciena Corp. NYSE: CIEN, Juniper Networks Inc. NYSE: JNPR, and other legacy computer tech companies that have most recently worked to adapt to the demands of the AI boom.

Cisco builds and sells a range of Internet Protocol-based networking tools and services. Its clients include businesses of all sizes, governments, educational institutions, and even service providers. Now, though, much of Cisco's focus is on cloud computing solutions, AI infrastructure, security, and related endeavors.

At this point, AI makes up just roughly 2% of Cisco's revenues, as the strength of the firm's legacy business remains solid. And yet, several analyst upgrades for Cisco stock have inspired investors in recent weeks to refocus on the tech firm, sending shares upwards by more than 12% in the last month as a result. Investors considering Cisco's potential in the emerging AI infrastructure landscape are advised to consider how the company is already working to capture a total addressable market estimated to reach more than $421 billion by 2033.

Upgrade From Citigroup, Buy Ratings From Other Analysts

Citigroup Inc. NYSE: C analyst Atif Malik upgraded Cisco on October 16, 2024. Malik moved the tech firm from Neutral to Buy, raising the price target by $10 to $62 per share in the process. This has followed after reiterations of buy ratings from analysts at Morgan Stanley NYSE: MS, Evercore, and Tigress Financial Partners in recent weeks. In response to the Citi upgrade, Cisco shares popped upward by about 5% throughout the day on October 16.

For Malik, Cisco has significant potential in the burgeoning field of ethernet-based AI. Cisco's pre-existing ethernet switches, which have been used previously to facilitate traditional computer networks, could also help to connect graphics processing units used in AI applications to other hardware. Malik views a potential rotation away from semiconductors and toward AI networking services as another likely benefit for Cisco.

Business Changes and Solid Fundamentals

A key business change that Cisco has recently enacted that could contribute to long-term top-line growth is the use of a subscription model for its networking solutions. Given Cisco products' high degree of integration in customer tech ecosystems, the move to a subscription fee model will not likely cost the company many customers. It will likely have the sizable benefit of generating recurring revenue.

Besides this, many of Cisco's core fundamentals are strong. With a forward P/E ratio of 19.5, Cisco shares are undervalued compared with many of its competitors. The company's gross margin for the most recent quarter was 64.4%, and its fiscal 2024 gross margin was a 20-year high of 64.7%.

Cisco's cash flow decreased from the final quarter of its fiscal 2023 to the latest quarter, but it remained a healthy $3.7 billion. This provides Cisco ample room to continue a strategic pivot toward AI applications.

Value and Dividend Appeal

The combination of Cisco's compelling P/E ratio and strong cash flows means it is a good choice of dividend stock for investors who are optimistic about the firm's long-term prospects.

Cisco's annualized three-year dividend growth is 2.72%, its dividend yield is an attractive 2.82%, and its dividend payout ratio is sustainable at 53.87%.

By contrast, rival Juniper Networks has a dividend yield of 2.24% and a dividend payout ratio of 127.54%, suggesting that it may not have the resources to continue to pay dividends at the current rate without an underlying shift.

This further highlights Cisco's financial stability and strategic positioning, making it a potentially safer bet for dividend-focused investors in the technology sector. Additionally, Cisco's ability to maintain consistent cash flows through market fluctuations bodes well for long-term sustainability.

Case For Long-Term Approach

Cisco shares have risen by 5.6% in the last year and are currently trading at a one-year high, though they remain below levels achieved at the end of 2021. Its general resilience in the face of supply chain issues and the semiconductor shortage in recent years is evidence of its stability throughout different market conditions. As AI continues to boom—and particularly as the technology expands into the realm of ethernet connectivity—few companies are better prepared than Cisco to rise to the occasion.