While overshadowed by other major tech stocks‘ performance, Cisco Systems (NASDAQ:CSCO) is no slouch in year-to-date gains. CSCO stock has rallied by more than 18.5% since January.
Cisco is also not a slouch in potential growth catalysts. Sure, look at forecasts, the enterprise hardware company will report middling earnings growth over the next few years. However, it is possible that these forecasts are underestimating the impact of two catalysts.
As you may have guessed, one of these has to do with the artificial intelligence mega-trend. Growing adoption of AI by large enterprises bodes well for the company’s future results.
The other catalysts, though, have little to do with AI, but could help drive this stock to higher prices. With this, let’s take a closer look and see why.
CSCO Stock, Recent Numbers and AI
Last month, Cisco released its results for its fiscal fourth quarter (ending July 29). For the period, the company reported a 16% jump in revenue compared to the prior year’s quarter, and an even larger year-over-year increase (43%) in earnings per share.
Investors reacted positively to this earnings report. That’s clear from its performance since they revealed the numbers on Aug. 16. However, it was not just the results themselves that sparked further bullishness for shares.
Cisco’s updates to outlook played a role as well. This came despite guidance that, overall, could be best described as mixed.
So, why did investors react favorably to guidance? Management provided a clearer picture of the extent to which the AI mega-trend will provide a boost to revenue/earnings down the road.
AI will not likely have much effect on results this fiscal year, but it may be a different story in the following fiscal year (ending July 2025).
Some of this recent AI-related excitement for Cisco could soon calm down. Fortunately, there are some other catalysts that may keep shares on an upward trajectory, ahead of an AI “payoff moment” finally arriving.
Don’t Rule Out These Two Non-AI Catalysts
Given the company’s timeline for capitalizing on AI, it makes sense why CSCO stock has received only a moderately high boost from this factor. However, there are two non-AI catalysts that could play out over a shorter time frame.
First, there could be a sooner-than-expected demand rebound in tech. Like other enterprise tech companies, Cisco’s results have been hit hard by softening demand for the past year.
Large businesses have cut back on IT spending, in light of macro uncertainties like high inflation, rising interest rates, and slowing economic growth.
Yet while the company’s FY2024 guidance suggests the tech doldrums to carry on in the coming quarters, that may not be the case. The latest economic indicators point to increased chances of an economic soft landing.
This could mean stronger-than-expected quarterly numbers for CSCO, resulting in shares adding to their 2023 gains during the rest of the calendar year, and into 2024.
Second, irrespective of when a demand rebound arrives, Cisco’s focus on improving margins could enable it to beat current earnings expectations. This too, is something that could help justify a re-rating for the stock. Shares have ample room for a re-rating, based on their current valuation.
An Appealing Play for Growth and Value Investors
At current prices, CSCO trades for 14 times forward earnings. This represents a low valuation, relative to other large top Nasdaq 100 index components. Yes, the aforementioned sluggish growth projections explain this low multiple.
However, with many avenues to a re-acceleration of earnings growth, Cisco’s valuation could pop back up.
In prior years, CSCO traded for between 15 and 20 times earnings. Speaking of valuation, CSCO’s low multiple makes this stock appealing to not just growth-focused investors.
Those more valuation-conscious may find it appealing as well. Besides providing a greater opportunity for upside, additional downside may be limited. Cisco’s valuation today may price-in much of the uncertainty over future results.
The market may be less excited about CSCO stock relative to other names in the sector, yet with both AI and non-AI catalysts on tap, this may soon change.
CSCO stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
