Cisco Systems Inc., (NASDAQ: CSCO), received a boost of confidence from HSBC today. The bank upgraded the stock’s rating from “Hold to “Buy”, and increased its target price from $46 up to $58.
The new price target is a 20% potential increase over the closing price of the day before, signaling re-emphasis on Cisco’s growth prospects in future, especially for its security and networking segments.
Why HSBC has a bullish view on Cisco
HSBC upgraded Cisco on the basis of an optimistic outlook for its future performance. This is especially true in Cisco’s core networking sector and in rapidly expanding security.
HSBC forecasts a growth of 11,6% per year in Cisco’s non-GAAP earning per share (EPS), from 2024 to 2027.
Cisco is expected to surpass its guidance in 2025 and the consensus estimate by achieving non-GAAP earnings of $3.86.
The first quarter of the FY25 will likely show a weak growth year-over-year due to difficult comparisons with the FY24.
Cisco reports strong earnings for Q4
The upgrade comes after Cisco’s Q4 report on strong earnings, which was released August 14, 2024.
The company’s revenue was $13.64 Billion, which is slightly higher than the $13.54 Billion consensus estimate. Its non-GAAP earnings were $0.87 and beat expectations by $0.02
Splunk’s recent acquisition, which contributed $960 millions to quarter revenue, was a key factor in this performance.
The acquisition of Cisco underscores Cisco’s focus on growing its presence in AI and cloud technologies, as well as cybersecurity. These are all seen by Cisco to be critical growth areas.
Cisco stock, despite these good results, has remained relatively static in the last few years. It is often called a zombie stock because of its lackluster movement.
The Q4 results report, however, sparked an increase of 6.8% in the stock price of Cisco on August 15th. This indicates a renewed investor interest.
Wall Street reacts in a mixed way
Analysts have mixed opinions about the upgrade by HSBC.
Piper Sandler reiterated on August 15 its “Neutral”, with a price target of $52, citing concern over the sustainability in growth, given macroeconomic headwinds as well as ongoing organizational changes.
Wells Fargo is more confident about Cisco’s AI potential, especially in the long term. The company says it has secured AI orders worth over $1 billion with customers who use webscale, and another $1 billion will be expected by FY25.
Wells Fargo has a “Equal Weight”, with a price of $57 as its target.
Citi Research has also given a rating of “Neutral”, with a price target of $52, noting that, while Cisco’s outlook is stable for the FY25, it will be some time before the benefits from the Splunk purchase are fully realized.
Cisco’s AI, cloud and cybersecurity focus
Cisco faces both challenges and opportunities.
Its focus on AI and cloud computing, as well as cybersecurity, positions the company to grow in new markets.
The legacy business of networking is still a major drag on the company, as its Q4 revenue was down by 28% compared to last year.
Cisco’s strategic restructuring includes a reduction of 7% in the company’s workforce.
The restructuring aims to reallocate resources into areas of high growth, which could increase future profits.
The integration of Splunk is promising but also poses some risks. These include the inability to achieve operational synergies or maintain service quality.
What is the potential upside for a 20% increase?
Cisco’s current valuation is modest compared with its peers in the tech industry, reflecting both its matured business model and its slower growth prospects.
According to the company’s FY25 guidance, revenue is expected to grow by around 4.1%. Non-GAAP earnings are projected between $3.52 & $3.58.
These figures show stability but also the difficulties Cisco has in expanding its top line.
HSBC’s $58 price target suggests a possible upside of 20%. This is contingent upon Cisco’s ability to successfully navigate short-term obstacles and execute its AI, cybersecurity and AI strategies.
Investors will want to watch how Cisco executes these strategies in the coming months and whether it can achieve the growth HSBC anticipates.
The stock market remains weak on the long-term charts
Cisco’s share price experienced a drastic drop in 2022, when it dropped from over $62 down to under $40. Cisco stock, although it recovered in the first part of 2023 and has risen since October 20, 2023 like most other tech stocks, fell significantly over that time.
TradingView
Cisco stock is still weak on the charts over time, despite yesterday’s movement. The stock’s support has been near $45.7 twice in the last few weeks.
Investors who believe the stock is going to rise can start a small position with a $45.5 stop-loss. Once the stock closes above its bearish long-term trendline, they may increase their position.
After yesterday’s movement, traders who are still bearish about the stock should refrain from opening new short positions as indicators on short-term have now turned positive.
Short positions should only be taken if the price of the stock falls below $45.7, or reaches its bearish long-term trendline.
HSBC Upgrades Cisco to a ‘Buy” with a $58 target price: Should you buy? This post may change as new information unfolds
