HSBC upgrades Cisco to ‘Buy’ with $58 price target: Should you invest?

Cisco Systems Inc. CSCO received a vote of confidence today as HSBC upgraded the stock from “Hold” to “Buy” and raised its price target from $46 to $58. 

This new target represents a potential upside of 20% from the previous day’s closing price, signaling renewed optimism about Cisco’s future growth prospects, particularly in its networking and security segments.

Why HSBC is bullish on Cisco

HSBC’s upgrade is grounded in an optimistic forecast for Cisco’s future performance, especially in its core networking and rapidly growing security sectors. 

HSBC projects a compound annual growth rate (CAGR) of 11.6% in Cisco’s non-GAAP earnings per share (EPS) from 2024 through 2027. 

They anticipate that Cisco’s non-GAAP EPS will reach $3.86 in fiscal year 2025, surpassing the company’s guidance and consensus estimates. 

However, the first quarter of FY25 is expected to show weak year-over-year growth due to challenging comparisons with FY24.

Cisco’s strong Q4 earnings report

This upgrade follows Cisco’s strong Q4 earnings report, released on August 14, 2024. 

The company reported revenue of $13.64 billion, slightly above the consensus estimate of $13.54 billion, and a non-GAAP EPS of $0.87, beating expectations by $0.02.

A key driver of this strong performance was the recent acquisition of Splunk, which contributed approximately $960 million to the quarter’s revenue. 

This acquisition underscores Cisco’s strategic focus on expanding its presence in AI, cloud, and cybersecurity, all of which are seen as critical growth areas.

Despite these positive results, Cisco’s stock has been relatively stagnant in recent years, often referred to as a “zombie” stock due to its lack of significant movement.

However, the Q4 earnings report sparked a 6.8% surge in Cisco’s stock price on August 15, indicating a renewed interest from investors.

Wall Street’s mixed reactions

The upgrade from HSBC comes amidst mixed views from other analysts. 

On August 15, Piper Sandler reiterated its “Neutral” rating with a $52 price target, citing concerns over the sustainability of growth given macroeconomic headwinds and ongoing organizational changes.

Wells Fargo, however, remains more optimistic about Cisco’s long-term potential in AI, highlighting that the company has already secured over $1 billion in AI orders with webscale customers, with another $1 billion expected in FY25. 

Wells Fargo maintains an “Equal Weight” rating with a $57 price target.

Citi Research also holds a “Neutral” rating with a $52 price target, noting that while Cisco’s outlook for FY25 is stable, the full benefits of the Splunk acquisition will take time to materialize.

Cisco’s focus on AI, cloud, and cybersecurity

Cisco’s business shows both promise and challenges. 

The company’s strategic focus on AI, cloud, and cybersecurity positions it well in growth markets. 

However, its legacy networking business remains a drag, with networking revenue down 28% year-over-year in Q4.

To address these challenges, Cisco has undertaken a strategic restructuring, including a 7% reduction in its workforce. 

This restructuring is aimed at reallocating resources to high-growth areas, potentially enhancing future profitability. 

However, the integration of Splunk, while promising, poses risks, particularly in terms of achieving operational synergies and maintaining service quality during the transition.

Potential upside of around 20%?

Cisco is currently trading at a relatively modest valuation compared to its tech peers, reflecting its mature business profile and slower growth prospects. 

The company’s guidance for FY25 suggests revenue growth of around 4.1%, with non-GAAP EPS expected to be between $3.52 and $3.58. 

While these figures indicate stability, they also highlight the challenges Cisco faces in achieving meaningful top-line expansion.

HSBC’s price target of $58 suggests a potential upside of around 20%, contingent on Cisco’s ability to navigate near-term challenges and successfully execute its AI and cybersecurity strategies. 

For investors, the key will be to monitor how these strategies unfold in the coming quarters and whether Cisco can deliver on the growth HSBC expects.

Stock remains weak in the long-term charts

Cisco’s stock saw a dramatic downturn in 2022 when it fell from above $62 to below $40. Although it did manage a recovery in the first half of 2023, unlike most tech stocks that have surged since October 2023, Cisco’s stock has fallen significantly during that period.