The past three months have been a bit rough on Cisco Systems, Inc. (NASDAQ:CSCO), with CSCO stock down about 4.4% during that timeframe. If you ask Bernstein analyst Pierre Ferragu, however, the fundamental case for Cisco stock is as strong as it has ever been.
Slapping a price target of $35 on CSCO stock, Bernstein sees room for a 16% improvement from where shares trade today. Specifically, the catalysts Ferragu’s team notes include an improved macro-environment and easier compares.
“We continue to believe Cisco’s fundamentals are stronger than ever. While usual bear arguments (white box, SDN, move to the cloud) continue to hurt sentiment and a difficult macro-environment hurts topline, the company is successfully moving towards a higher quality and more profitable subscription revenue model, underpinned by an increase of software and cloud-based services in its revenue mix.”
Debunking the CSCO Stock Bear Cases
Notably, Bernstein takes some Cisco bear cases to task, dubbing bearish takes on white box, software-defined networking and CSCO’s cloud transition as “fragile” arguments.
If the white-box hype is “bursting like an ill-crafted soufflé au fromage,” then it’s just as well that Cisco and its network of vendors sling “much more than just boxes.”
“They offer end-to-end networking environment to their clients and only extreme players like Google and Amazon will find value in developing their own environment running on white-box hardware.”
Software-defined networking, Bernstein notes, is “daunting” from a development standpoint. Rather than companies developing their own solutions or opting for Arista Networks Inc’s (NYSE:ANET) platform, the analysts believe Cisco will maintain its lead in this market.
The move to the cloud, too, is “objectively not a reality.” Rather, it’s more of an expansion, to which Ferragu compares to the use of legacy mainframes in computing:
“Remember mainframes, which were all what IT was in banking three decades ago. Over the last thirty years, banks have not developed a single new application on mainframes, but have maintained them for their core applications … and have kept spending on mainframes over that period.”
Bottom Line on CSCO Stock
With a dividend yield of 3.5% and 5% to 10% in earnings growth, Bernstein sees CSCO stock offering a return you can’t refuse. The transition to a recurring revenue model only serves to bolster the case for Cisco stock, while the improvement of the macro picture in 2017 should bring the company back to year-over-year growth.
The analysts expect CSCO to report earnings above consensus for the full fiscal year, while the improving macro picture in the second half of 2017 should push Cisco revenues 3% above consensus and per-share earnings 6% above estimates in 2018.
You could do a lot worse.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.