Company is generating 65% of software sales from recurring subscriptions, validating its new business model: analysts
Cisco Systems Inc. is eliciting cheers from analysts on Thursday, after the company quelled doubts with its latest earnings report.
The networking giant beat expectations with its January-quarter resultson Wednesday afternoon, and its chief executive shrugged off some of the macroeconomic concerns that had been worrying investors going into the report. Shares were last up 2.8% at $48.85, after touching an intraday high of $49.68, a level that the stock has not closed at since December 2000, according to Dow Jones data.
In all, Cisco’s CSCO, +0.37% earnings commentary showed that the company has “fundamental resiliency amid fluid macro uncertainties and the company’s investment execution in core market expansion,” according to Wells Fargo analyst Aaron Rakers.
Rakers is upbeat about the company’s business-model shift, as Cisco is now generating 65% of software sales from recurring subscriptions, 10 points higher than a year ago. He upped his price target to $57 from $52 late Wednesday and maintained an outperform rating on the stock.
Resilience was also a theme for J.P. Morgan analyst Samik Chatterjee, who has an overweight rating on Cisco and raised his price target to $60 from $59.
“Cisco’s F2Q earnings and F3Q outlook can be broadly characterized as modestly better than expected, although what makes it stand out is the resilience of the performance despite consistent concerns relative to macro growth; marking a significant change for a stock that was once considered a bellwether for the industry and still trades at a discount to the overall market multiple,” Chatterjee said, adding that growth momentum in applications and security sales underscored the success of Cisco acquisition strategy such as the company’s acquisition of Duo Security last year.
FBN Securities analyst Shebly Seyrafi said that the company’s latest numbers showed “more good than bad,” given strong indications in switching, wireless, applications, and security. These outweigh his concerns about the decline in Cisco’s routing business and a deceleration in some key emerging markets.
Seyrafi raised his target price to $60 from $55 and reiterated his outperform rating on the shares.
William Blair’s Jason Ader expects Cisco’s “broad-based strength” to persist “with little impact from macro events.” He also cheered the company’s acquisition strategy, following the purchases of Luxtera and Singularity Networks during the quarter.
“We like the optionality of Cisco being able to use its cash war chest to bolster its growth through strategic M&A,” wrote Ader, who has an outperform rating on the stock.
MKM Partners analyst Michael Genovese, who has a neutral rating and raised his “fair value estimate” to $54 from $51, said he was surprised by Cisco’s 18% growth in public sector orders even with the U.S. government shutdown in December and January, but he doesn’t think that momentum is sustainable.
“In addition, the macro environment has been very cooperative recently, and could cool a bit going forward, Genovese said.
Needham’s Alex Henderson, however, said that the latest results “weren’t as good as many think.” He called the company’s growth rates “artificially inflated” due to new accounting rules and highlighted Cisco’s “financial engineering” through buybacks.
“The growth is less than nominal GDP growth and the comps get tougher as the year progresses,” wrote Henderson, who rates the stock at hold. “To be clear, the Street is lauding the results, [and] we simply think they were solid but not as strong as some may think.”
At least 13 analysts increased their price targets on Cisco shares after the report, according to FactSet. Of the 30 analysts tracked by the service who cover the stock, 21 have buy ratings and nine have hold ratings. The average target price is $54.72, about 12% above recent levels.
Cisco’s stock has gained nearly 10% over the past three months, while the Dow Jones Industrial Average DJIA, -0.41% has risen 1.8%, the S&P 500 index SPX, -0.27% has gained 1.9%, and the tech-heavy Nasdaq Composite Index COMP, +0.09% has advanced 4.3%.