Systems stock is getting a boost on Friday from Wolfe Research analyst Jeff Kvaal, who lifted his rating on the networking-infrastructure giant’s stock to Outperform from Peer Perform, setting a target price of $63, for a potential gain of about 20% from the current level.
Cisco (ticker: CSCO) stock has rallied 20% for the year to date, aided by both a rotation by tech investors into cheaper legacy infrastructure plays from pricier cloud-computing shares, and a growing view that enterprise-IT spending will pick up as the economy reopens. Kvaal sees more gains ahead.
“Strong IT spending should prove a tailwind to Cisco estimates through fiscal 2022,” Kvaal writes in a research note. The analyst adds that “Cisco’s improving structural narrative,” including more software revenue and growing exposure to public cloud players, “merit multiple expansion.”
Kvaal writes that his firm’s March survey of chief information officers demonstrated “firming” IT spending. “Our survey illustrated that spending focus has tilted back from all public cloud at the pandemic’s onset toward a balance of public cloud and on-prem/private cloud gear—Cisco’s wheelhouse,” he writes.
The analyst also notes that “relatively poor” performance with “webscale” cloud players has been a strategic hole for Cisco for years—but one which it is now reversiing. He says trailing 12 months orders from webscale customers rose 60% in the January quarter.
Wolfe notes that Cisco stock has a five-year average two-year forward earnings multiple of 14 times; he thinks that a combination of a spending snapback, greater software mix, and an “emerging webscale story” merit a higher multiple. His target price is based on a 17x multiple based on a calendar 2022 earnings estimate of $3.73 a share.
Cisco stock on Friday is trading up 2.5%, to $52.94.
Write to Eric J. Savitz at firstname.lastname@example.org