Improving Demand Trends Lead Deutsche To Raise Price Target On Cisco Systems

Deutsche Bank raised its price target on Cisco Systems, Inc. CSCO by $2 to $37 on modest uptick in demand trends in cloud scale data center build outs, parts of US Enterprise, and Public Sector.

"Further, we note a de-risked October Quarter guide and setup for a directionally higher margin profile based on an accelerating mix shift to Recurring Revenues," analyst Vijay Bhagavath wrote in a note.

However, the analyst is wary of smaller deal sizes, back end loaded year for service provider network upgrades and near-term weakness in parts of Europe and in emerging markets.

"Near term product cycles for CSCO's Switching business are 25/50G server refresh driving 100G top of rack and spine/core switch refresh, Cloud Automation and Security Analytics software and Hyperconverged platforms," Bhagavath noted.

According to the analyst, Cisco's areas for inorganic growth are likely to be centered around Cloud Security, Advanced Services, Big Data Analytics, Machine Learning, and Cloud Automation Tools.

"CSCO's architectural plays in these new growth areas are likely to be viewed positively by investors given their above corporate margin contribution to FY17+ fundamentals," Bhagavath highlighted.

In addition, the analyst is still convinced on the rerating potential of Cisco's multiple during FY17/18 as investors start to value the company as a "systems" business.

Bhagavath reiterated his Buy rating on the stock. The revised price target represents a potential upside of 19 percent.