Cisco Systems Is Entering a Major Transformation That Investors Should Like

Cisco Systems has a low valuation and its transition to software looks promising. As a result, shares have 18% upside, according to one analyst.

Author:: Bret Kenwell
Publish date:: Jan 5, 2018 11:29 AM EST

Tech has been a hot commodity so far in 2018, with the PowerShares QQQ ETF (QQQ) - Get Report already rallying about 3.3% this year. Cisco Systems (CSCO) - Get Report has helped the cause, piecing together its own 3% rally to start the year.

Helping matters on Friday morning is an upgrade from the analysts at Bank of America/Merrill Lynch. Specifically, Tal Liani upgraded Cisco stock to buy from neutral and bumped his price target to $46 from $37. As of Thursday's close -- a penny short of $39 -- Liani's price target implies about 18% upside.

That would add to Cisco's powerful rally over the past 12 months, in which shares have climbed almost 32%. That doesn't include the roughly 3% dividend yield that Cisco pays annually as well.

So why does Liani think more upside exists in Cisco stock?

He argues that Cisco is "in the early stages of a positive transition to software." Although moving into software is not necessarily a new strategy for the company, Liani says he is more comfortable with where Cisco is in following years of uncertainty.

In a nutshell, Cisco transitioning to software is not groundbreaking coverage. But where the company is at in that transition appears encouraging to Liani.

When combined with a valuation that is below its peers, Cisco stock appears attractive, he contends. Despite the stock's big gains in 2017 and 3% dividend yield, shares trade at ~15 times forward earnings estimates.

Cisco stock is up 1.2% in early Friday trading.

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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.