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Cisco’s expected return to revenue growth sends stock to 2001-era levels

Cisco Systems Inc.’s forecast of a return to revenue growth after a two-year drought sent shares to levels not seen since the dot-com bust on Thursday and analysts scrambling to raise stock price targets, as the networking equipment giant pivots to a more software-based strategy.

Cisco CSCO, +5.79% shares rallied 6.1% to $36.21 in recent trading, after touching an intraday high of $36.67. A close at that level would mark the stock’s highest finish in nearly 17 years. The last time Cisco shares closed higher was Jan. 31, 2001, at $37.44, according to FactSet data. After lagging behind the Dow Jones Industrial Average DJIA, +0.84% Cisco shares are now up 20% on the year, compared with the 19% gain on the Dow.

Late Wednesday, Cisco forecast revenue growth of 1% to 3% for its fiscal second quarter, or a range of $11.70 billion to $11.93 billion, following eight consecutive quarters of year-over-year revenue declines.

By Thursday, 14 analysts had hiked their price targets on Cisco stock, for an average of $38.33, a 12% increase from the average price target of $34.10 before earnings. Also, analysts raised their earnings forecasts to a consensus of 59 cents a share, from 58 cents a share, for the second quarter, and to $2.46 a share, from $2.43 a share, for the year, according to FactSet. Cisco forecast second-quarter earnings of 58 cents to 60 cents a share late Wednesday.

First Take: Cisco promises return to growth, but for how long?

Here’s what analysts were saying after Cisco’s earnings report:

RBC Capital Markets analyst Mitch Steves, who has an outperform rating on Cisco and raised his price target to $40 from $36, was quick to point out that the company’s guidance excluded revenue from the pending acquisition of BroadSoft Inc. BSFT, +0.05% He said:

Cisco is executing according to plan and we are impressed by the security growth, recurring revenue growth, and the steady capital allocation program.

Raymond James analyst Simon Leopold, who has an outperform rating and raised his price target to $37 from $35, was “pleasantly surprised by a forecast for a return to y/y growth that we consider sustainable,” noting that a doubling in deferred revenue at Cisco was proof of progress in the company’s transition to more software-based products.

Deferred revenue refers to payments received on long-term contracts that will not land on the balance sheet until future quarters and how companies generally account for subscription-based services. Leopold highlighted Cisco’s report that deferred revenue came in at $18.6 billion, up 10% from the year-ago period, and that deferred product revenue for subscription-based and software offerings rose 16%, with recurring software and subscription offers increasing by 37%

However, not all analysts were convinced of the sustainability of revenue growth. MKM Partners analyst Michael Genovese, who has a neutral rating and raised his price target to $38 from $34, said while he’s positive on Cisco’s results and outlook, he doesn’t see much more multiple expansion on the stock price past forward earnings, and expressed some concern whether significant revenue growth would hold going into the second half of 2018. He said:

We think competitive issues in the Infrastructure market could be adding to the pressure. We also wonder why the outlook isn’t stronger given that the company’s growth is weighted toward Applications, Security, Services and software.

Deutsche Bank analyst Vijay Bhagavath, who has a buy rating and raised his price target to $45 from $40, said his research shows that trends in improved enterprise and IT spending are playing into Cisco’s transformation plans.

An “architectural” orientation to IT purchasing decisions, and the systematic shift from “capex” to “As a Service - opex” is playing increasingly to CSCO’s portfolio strength - explaining the setup for improving fundamentals.

Morgan Stanley analyst James Faucette, who has an overweight rating and raised his price target to $39 from $38, said that the integration of security and networking decisions play to Cisco’s strength, noting the company’s announcement that 1,100 customers adopted Catalyst 9000 campus switching products with built-in advanced security features in three months. Faucette said:

We now expect that Cisco can post Y/Y revenue growth in FQ2 (organically and inorganically) in large part because of the Catalyst switching opportunity heading into 2018. We would note that this growth is despite a 150-200bps headwind that exist due to a conversion to a subscription model in parts of the portfolio (namely campus switching).

Of the 29 analysts who cover Cisco, 20 have overweight or buy ratings and nine have hold ratings. None of those analysts changed their ratings on the stock following earnings.


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