On Monday, JPMorgan adjusted its stance on Cisco Systems (NASDAQ:CSCO), resuming the stock with a Neutral rating from Overweight and setting a new price target of $53, a decrease from the previous target of $62. The firm has reinstated coverage of Cisco with this new rating after a period during which it did not have a rating for the company.
The downgrade reflects a cautious view of Cisco's medium-term prospects despite a favorable near-term setup. JPMorgan notes that while there are moderating headwinds in the Networking market and Cisco's valuation is relatively discounted, the expected earnings per share (EPS) compound annual growth rate (CAGR) of over 5% for the fiscal years 2024 to 2027 is considered muted.
Cisco's Campus Networking segment, which includes Switches and Wireless LAN (WLAN), is still recovering from a surge in demand post-pandemic. Although the incremental challenges in this area are lessening, JPMorgan anticipates a slower-than-average recovery before normal replacement cycles resume.
The firm also mentions that Cisco's recent Campus Switch updates, particularly the CAT 9K family, have covered a significant portion of the installed base, implying limited potential for product cycle-related gains even as the broader market recovers.
Furthermore, JPMorgan projects that the integration of Splunk, a company that provides insights from machine-generated data, will positively contribute to Cisco's revenue growth by approximately 100 basis points (bps). This is expected to enhance Cisco's core revenue growth estimate from 2.5% to a total of 3.5%.
Despite these positive factors, the anticipated EPS CAGR of over 5% for FY24-FY27, including the impact of Splunk's consolidation in FY25, leads JPMorgan to maintain a conservative outlook. Given the moderate changes in the medium-term EPS forecast, the firm suggests that Cisco's shares should trade near their historical average multiple.