As Cisco Moves To A Subscription-Based Model, Goldman Sachs Initiates With A Buy

This year is a turning point for Cisco Systems, Inc. CSCO as it works to grow revenues and gross profits during a transition to a disaggregated model for hardware and software in campus switching, according to Goldman Sachs. 

The Analyst

Goldman analyst Rod Hall initiated coverage of Cisco Systems with a Buy rating and a $48 price target. 

The Thesis

Street gross margin assumptions for Cisco are low, while a revenue slowdown from the deferral of more revenue has already been discounted in the shares, Hall said in a Tuesday note. 

Goldman projects 5-percent-plus underlying revenue growth in 2019 and 2020, with margins likely to remain stable in 2018 as the mix shifts toward software and services revenues and then expands, the analyst said. 

"Cisco has made significant progress in its push to move its product offerings to a subscription-based model," Hall said. 

Goldman raised its 2018 and 2019 earnings estimates for Cisco by 5 percent and 12 percent, respectively, incorporating the firm's best estimate of the positive impact from U.S. tax legislation. 

Given Goldman's expectation that operating expenditure will revert from a bottom in 2017 toward historical levels, Hall said its opex estimate of 33 percent is conservative.

"Management's ability to restrain opex growth (consistent with consensus view) could lead to more earnings expansion than we currently forecast," Hall said. 

Goldman sees the potential for further multiple expansion driven by improving revenue visibility and inflection in Cisco's revenue and margin trajectory.

The Price Action

Cisco shares are up about 30 percent over the past year.

The stock was up 0.85 percent at $40.51 Wednesday afternoon. 

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