Cisco Stock Gains As Network Gear Maker Plots Software Transition; JPMorgan Adds to 'Focus List'

Network equipment maker Cisco is plotting a path that includes more software and subscription-related revenues over the next four years.

Cisco Systems  (CSCO) - Get Cisco Systems, Inc. Report shares moved higher Thursday after the network equipment maker told investors it expects to see greater revenues from software and subscriptions than its traditional core business.

Shares in the group were given an added boost after analysts at JPMorgan added it to their 'Focus List'. 

Cisco told analysts at an investor day event Wednesday that more than half its revenues will come from software and subscriptions by 2025 -- up from 44% currently -- adding it expects topline revenues of around $63 billion by that time. The higher-margin business will also improve profits, Cisco said, forecasting a compound annual growth rate for adjusted earnings of around 4% to 7% per year and setting a mid-point 2025 target of $4.07 per share.

"The key theme from the analyst day was the company’s ongoing shift to software-based revenues and subscription sales, as well as the breadth and depth of Cisco’s platform strengths across networking, security, infrastructure, and full-stack observability," said JMP Securities analyst Erik Suppiger, who carries a 'market perform' rating on the stock. "Management also views the intertwining trends toward hybrid/remote work and the shift to hybrid, multi-cloud architectures as favorable industry tailwinds that position the company to gain share."

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Cisco shares were marked 1.8% higher in early trading Thursday to change hands at $58.61 each, a move that would extend the stock's year-to-date gain to around 32%. 

Last week, Morgan Stanley lowered it price target on Cisco by $2, to $57 per share, and cut its rating from 'overweight' to 'equal weight' as analyst Meta Marshall argued that any 'bull case' for the stock requires a "stronger software growth trajectory".

Part of Cisco's challenge over the past couple of years has been growth largely happening away from the company’s core markets, causing Cisco to undergrow IT spend growth," Marshall said. "This was largely from Cisco not participating at size with hyperscale customers, and lagging in software solutions, which were gaining traction against hardware solutions."

Software revenues over Cisco's fiscal fourth quarter, which ended in July, rose 6% from the same period last year to $4 billion, with subscriptions up 9% on the quarter and 15% on the year. 

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