Cisco (CSCO) Could See a Microsoft-Like Re-rating - Bernstein

Bernstein analyst Pierre Ferragu rhetorically asked if Cisco (NASDAQ: CSCO) could be the next Microsoft and trade at $55 per share.

Ferragu highlighted that since new CEO Chuck Robbins took over, Cisco increased the share of subscription in product revenues from less than 6% to more than 12% today, and that part of the business was still growing 37% YoY in the last reported quarter and 39% YoY in the last 12 months. The analyst views this as a result of two fundamental trends in technology infrastructure: the emergence of the cloud and the generalisation of “Software-Defined” infrastructure. He sees this trend continuing and expects Cisco will exceed its 2020 targets: recurring revenues >37% of total and subscriptions 20% of product revenues.

The analyst highlights that a similar way, since 2012, Microsoft has driven their commercial business from on-premise perpetual licenses to Cloud and subscription. Since that time, Microsoft shares have outperformed the market by ~120% and rerated by 13 turns, from ~10x forward EPS in 2012 to ~23x today, he notes.

Ferragu believes Cisco shares could re-rate today’s 14x forward EPS multiple to ~20x. This would be justified by total returns (at 20x earnings we would expect 2.5% dividend yield, 5-10% EPS and DPS growth), and bring Cisco to a comparable level to stocks with material and growing recurring mixes. He said catalysts for this will play out over time: 1) stabilisation of revenue growth in the low single digits, 2) gross margin expansion and 3) acceleration of the transition in switching.

The firm maintained an Outperform rating and $40 price target on CSCO.

For an analyst ratings summary and ratings history on Cisco click here. For more ratings news on Cisco click here.

Shares of Cisco closed at $36.49 yesterday.

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