In the spotlight: A man passes under a Cisco logo at the Mobile World Congress in Barcelona, Spain. The company’s shares rose 2.8% on Wednesday. — Reuters
CISCO SYSTEMS INC investors have waited more than 25 years for this moment, with the stock trading at levels last seen during the peak of the dot-com era.
But as is so often the case in the technology world these days, whether the shares can clear that hurdle and set a new record depends on how much artificial intelligence (AI) accelerates the company’s growth.
On March 27, 2000, Cisco’s stock price hit a high of US$82 and then proceeded to lose about 90% of its value over the ensuing 18 months, bottoming out at US$8.12 on Oct 8, 2002.
It’s been a long ride back. On Nov 3, the networking equipment maker’s shares reached US$74.84, which is the closest they’ve come to their peak. They closed Tuesday about 13% from the intraday record.
Eliminating that last gap will likely come down to whether Cisco shows more pronounced benefits from AI.
The company’s earnings report after the bell on Wednesday will shed some light on that. But Wall Street pros are largely sceptical, despite the tens of billions of dollars Big Tech is pouring into AI infrastructure.
Shares rose 2.8% on Wednesday.
“AI is something that could be meaningful for Cisco, but so far we have very little evidence of an acceleration in growth that we can directly cite to AI,” said Dan Morgan, senior portfolio manager at Synovus Trust Co.
“The company is extremely stable, and maybe we are in the early innings of Cisco as an AI play.
“But even if things get more exciting we don’t see anything that will boost growth from 5% to 10%.”
Cisco’s earnings per share for its fiscal first quarter, which started Aug 1, are expected to rise 5.8%, with a 6.7% increase in revenue.
Its revenue for fiscal 2026 is projected to climb 5.3% and then decelerate modestly over the following few years, an indication that the company isn’t seeing the same kind of bounce as the AI winners.
That shows up in Cisco’s stock market performance. Its shares have risen 22% this year, roughly in line with the Nasdaq 100 Index.
However, since the start of 2023 when ChatGPT put a spotlight on AI, they’re up just 52%, while the Nasdaq 100 has soared 134%. That said, investors have reasons to consider Cisco’s potential as an eventual winner in the AI boom.
Results last quarter showed sales from AI projects picking up, despite the company’s cautious outlook.
It has partnered with Nvidia Corp to speed deployment of AI systems. And its recently unveiled Unified Edge product combines chips, storage, networking, and security software in a single rack of equipment.
Demand for AI infrastructure led UBS to upgrade the stock to “buy” earlier this month.
KeyBanc Capital Markets called Cisco “a relatively inexpensive way to invest in the AI thematic,” while also capitalising on its strong cash generation and capital return.
The AI trade has started showing some cracks lately, as investors grow concerned about the companies’ valuations and the ability of firms like OpenAI to meet their spending goals.
That volatility could work in Cisco’s favour, as its “boring” reputation – a mature business with steady growth that throws off a lot of cash and pays a dividend – could look appealing when things get dicey, similar to the way Apple Inc has recently outperformed as something of a tech haven.
Based on its stock market valuation, Cisco looks cheap. Its shares are priced at around 18 times estimated earnings, making them far less expensive than the S&P 500’s tech sector index, which has a multiple of roughly 30.
Cisco’s price-to-sales ratio is less than five. At its peak in March 2000, it was more than 60.
The company also pays one of the highest dividends in the tech sector, with a yield of roughly 2.3%. Companies like Microsoft Corp, Oracle Corp and Apple have dividend yields of less than 1%.
Still, Wall Street remains largely unconvinced by the investment thesis. Fewer than 60% of the analysts who cover the shares recommend buying them, a low percentage compared with other large-cap tech stocks.
Count Ted Mortonson, a technology strategist at Robert W. Baird & Co, among the optimists.
He expects a big refresh cycle as companies upgrade their outdated networking equipment, and he sees positive signs for Cisco’s optical business in the strong results from companies like Lumentum Holdings Inc.
“Cisco has all the pieces - a great supply chain, the partnership with Nvidia, one of the broadest optical portfolios of anyone on the Street - and it gets no credit for any of it,” Mortonson said.
“It will be a great 2026 name. But right now it is outside the momentum trade, which means people are totally missing it.” — Bloomberg
Ryan Vlastelica writes for Bloomberg. The views expressed here are the writer’s own.
