Cisco Systems Inc. shares rallied Thursday after analysts appeared in agreement that the networking company is turning the corner when it comes to its shift into software and subscriptions.
shares rose as high as $46.09 Thursday, and were last up 3.9% at $45.56, on track for their highest close since mid-May. The rise followed the company’s late Wednesday earnings and outlook, which topped Wall Street estimates.
Cisco shares are up 19% on the year while the Dow Jones Industrial Average
which counts Cisco as a component, is up 3.5%, the S&P 500 index
has gained 6.4%, and the tech-heavy Nasdaq Composite Index
has advanced 13.4% over the same period.
Driving some of the share momentum were comments from Chief Financial Officer Kelly Kramer, who said late Wednesday that total deferred revenue rose 6%, with deferred product revenue up 15% and deferred services revenue up 1% for the year, but added there was a 28% increase in unbilled deferred revenue, which is not noted on the balance sheet.
Strength in deferred revenue is important because that makes Cisco more predictable as it shifts over to software and subscription sales, Glenn O’Donnell, research director at Forrester Research, told MarketWatch. Notably, Cisco’s Catalyst 9000 line of network switches are a key components of this strategy as they are the first Cisco switches to require multiyear software contracts for operation.
BMO Capital analyst Tim Long, however, remained a little skeptical of how fast Cisco was shifting over to subscriptions while acknowledging the deferred revenue strength.
“The transition to a more software and subscription-based model continues to take shape,” Long, who has a market perform rating and raised his price target to $48, said in a note. “We are encouraged by continued growth in deferred product revenue and ramping subscription offerings, however despite these positive trends, revenue from recurring sources was stagnant at 32% and we remain disappointed with the overall slow pace of the transition.”
Other analysts pointed to other milestones, the third quarter in a row of revenue growth notwithstanding.
Piper Jaffray analyst James Fish, who has a overweight rating and a $50 price target, in a note entitled “Here Comes the Boom: Core Platforms Drive FQ4 Upside,” said growth was mainly organic for the quarter and that it was Cisco’s best top-line quarter since the fiscal second quarter of 2015.
“Importantly, product backlog was $6.6B and up 38% Y/Y, a positive indication of future product revenue,” Fish said.
Wells Fargo analyst Aaron Rakers, who has an outperform rating and a $50 price target, noted that product order growth at Cisco was its strongest since the second quarter of 2012.
Jefferies analyst George Notter, who has a buy rating and a $50 price target, said that “investor perceptions about the company as a ‘melting ice cube’ fighting against workload migration, market share pressures, etc. are wrong.”
“To the contrary — as networks get more complex — we think Cisco’s end-to-end network capabilities become increasingly strategic to Enterprise and Service Provider customers,” Notter said in a note.
But mostly, analysts appeared cautiously optimistic about Cisco.
J.P. Morgan analyst Samik Chatterjee, who has an overweight rating and raised his price target to $59, said Cisco’s results validate its strategic transformation, but was cautious.
“However, while we are starting to see the early benefits of Cisco’s transformation in the form of accelerating revenue growth, we believe there are additional legs to the earnings growth trajectory in the future from greater leverage of the revenue growth to profits which is currently limited by the strong pace of investments by the company (including in bolt-on technology acquisitions, which we believe are accounting for roughly 60% of the y/y increase in operating expenses).”
Raymond James analyst Simon Leopold, who has an outperform rating and a $50 price target, also praised Cisco on its execution but didn’t want to get too excited.
“We see enterprise demand as healthy and saw improvement from the previously weak service provider vertical.” Leopold said. “We worry about the global macro presenting risk, and imagine some grumble about deceleration in metrics such as deferred revenue growth. We won’t look this gift horse in the mouth but strive to keep our model conservative.”
MKM Partners Michael Genovese, who has a neutral rating and a $51 price target, said Cisco’s guidance showed optimism for 5G technology adoption.
“Management said the Service Provider order strength was from a handful of customers, which we think are concentrated in Asia, and is not yet driven by 5G network build implementation which will begin in a year,” Genovese said. “However, it sounds to us like the improvement in Service Provider demand Cisco is seeing is related to capacity increases at the Edge of the network (i.e., Cell Sites, Central Offices, Data Centers) in order to prepare the transport network for 5G network requirements.”
Needham analyst Alex Henderson, who has a hold rating, remarked that Cisco’s $6 billion repurchase of 138 million shares, with $19 billion in authorization left, “should continue to make the shares look low-risk as Cisco could still pull in a large number of shares.”
The average analyst price target for Cisco shares rose to $50.33 from a previous $49.26 as nearly a quarter of the analysts covering the stock raised their price targets, according to FactSet. Of the 29 analysts who cover Cisco, 21 have buy or overweight ratings, eight have hold ratings and no analysts have sell or underweight ratings.
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