Cisco Systems stock is in a strong bull run this year and is the best-performing company in the Dow Jones Index. It has jumped by 60%, beating other top companies like Caterpillar, Travelers, Chevron, and Coca-Cola. This surge happened as the company became a major provider of AI infrastructure solutions.
Cisco Systems’ business is booming amid the AI boom
CSCO stock has done well this year as it became one of the main beneficiaries of the ongoing AI boom that has pushed demand for its products higher.
Its networking solutions like switches, routers, optics, and silicon are doing well because of their role in data centers.
At the same time, the company has become a major player in the security services industry, where demand is rising. For one, companies like Anthropic and OpenAI have reported some AI hacks in the past few weeks.
The recent earnings showed that its business did well in the fiscal third quarter. Its revenue jumped by 12% to $15.8 billion, with its operating income hitting $5.4 billion. This growth happened as the amount of its hyperscaler orders jumped from $2 billion last year to an estimated $9 billion this year.
This growth has more room to go in the near term as most hyperscalers have vowed to keep boosting their spending. For example, Google plans to spend over $205 billion this year, while the biggest names in the industry plans to spend over $700 billion.
Analysts are optimistic that this growth will accelerate in the next few years. The average estimate is that its revenue will jump by 11% this year to $62 billion, followed by nearly $70 billion next year.
Cisco’s margins continue rising because some of its products are currently in short supply. As a result, the earnings-per-share (EPS) is expected to jump from $3.81 to $4.28.
Shareholder returns and valuation
These numbers mean that the company will continue its shareholder returns. It paid a 42-cent dividend in the third quarter and repurchased 16 million shares. It now has about $9.6 billion remaining in its authorization. These repurchases has pushed its outstanding shares to about 3.94 billion, down sharply from over 4.21 billion in 2021.
There are signs that the company has become a bit overvalued. It has a forward price-to-earnings ratio of 27, slightly higher than the sector median of 23. This multiple is slightly higher than the five-year average of 15. This premium is mostly because its business has now become supercharged
By adding its revenue growth and profit margins, we see that the company has a rule-of-40 metric of 30%, lower than the important metric of 40. Therefore, the management will need to report strong earnings to justify the valuation.
Cisco stock price technical analysis
CSCO stock chart | Source: TradingView
The daily chart shows that the CSCO stock jumped sharply after publishing its financial results in May. It soared by over 13% in a single day. The stock then dropped and bottomed at $107.7 on July 16 this year.
There are signs that the stock has bottomed out and is now rebounding as bulls target the year-to-date high of $130. It has remained above all moving averages, and the MACD indicator continues rising.
Therefore, the stock will likely continue rising as bulls target the year-to-date high of $130. A move above that level will point to more gains, potentially to $150.
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