Cisco stock received a favorable update from Citi, with the firm's analyst upgrading the stock from Neutral to Buy. Accompanying the upgrade is an increased price target, now set at $62.00, up from the previous $52.00.
Cisco shares gained 1.7% in premarket trading.
This adjustment reflects the analyst's expectation of Cisco benefiting from growth in the Ethernet AI Total Addressable Market (TAM) and a shrinking valuation gap compared to its peers.
The analyst noted that while artificial intelligence (AI) represents a small portion of Cisco's business—approximately 2% of revenue—there is potential for a more significant contribution in the future. The optimism is partly based on the anticipation of more AI developments, which could lead to a more positive outlook for the networking equipment sector.
As a result, investors might shift their focus from semiconductors and hardware to networking equipment, potentially enhancing the group's valuation.
Citi has also revised its earnings per share (EPS) estimates for Cisco for fiscal years 2025 and 2026, increasing them by 2% and 5%, respectively. The new price target of $62.00 is based on a 16x price-to-earnings (P/E) multiple, which is still notably below the peer average of approximately 25x. This discount takes into account ongoing concerns over core market share losses, which are partially mitigated by the emerging AI opportunity.
The analyst suggests that with the expected sales trough in July-Quarter and fiscal year 2024, there is limited potential for further downside. The upcoming October-Quarter results, to be reported on November 13, are seen as a potential catalyst for the stock.