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Cisco Systems Inc. is poised to benefit from a continued recovery in information-technology spending, helping to earn its stock an upgrade Friday.
J.P. Morgan analyst Samik Chatterjee raised his rating on Cisco shares CSCO, +3.90% to overweight from neutral in a Friday note to clients, arguing that the recovery in enterprise technology spending is on track to exceed expectations. Cisco shares were up 3% in Friday morning trading and leading the Dow Jones Industrial Average DJIA, +0.50% higher.
Forecasts from research and advisory company Gartner suggest the potential for “strong mid-single-digit growth” in enterprise spending, Chatterjee wrote, “which is a growth level last seen in 2018 on the back of the passage of the Tax Cuts and Jobs Act at the end of December 2017.” Cisco is poised to benefit in Chatterjee’s view, since the company’s revenue has a high correlation with enterprise IT spending trends.
Cisco faces easier comparisons this year, Chatterjee noted, as revenue declined 9% in the first half of 2020 and 5% in the second half. “Strong top-line growth” for Cisco has historically been correlated with upward movement for its shares, he continued, which could be an upbeat sign for 2021.
Chatterjee also cheered the potential for Cisco’s Catalyst 9K switching portfolio. Though the 9K portfolio has replaced about a quarter of Cisco’s legacy installed base so far, Cisco’s campus switching revenues declined over the past year due to a pullback in tech spending. As spending recovers, Chatterjee expects that new customers will “adopt the new products rather than legacy products, leading to a quicker transition of the installed base to a recurring revenue mix.”
Chatterjee upped his price target on Cisco’s stock to $55 from $50. The shares have gained 3.5% over the past three months as the Dow Jones Industrial Average has increased 3%.
