Cisco Stock Forecast: Executive Summary

New Possible M&A Deal

Software Release Improves ACI

Year End Predictions

I Know First algorithm is currently bullish on Cisco

US only revenue grew 6% Y/Y in 1Q16. Cisco’s TSS (Technical support services) revenue declined by 1% Y/Y in 1Q16, while Advanced services grew 9% Y/Y. Overall, Cisco reported switching revenue growth of 5% Y/Y in 1Q16. Adjusted for storage, switching revenue growth was 7% Y/Y up from 2% in 4Q15.

Once again, “Catalyst” one of their core products, was the main driver in sales. Catalyst + Old Nexus grew 8% Q/Q in FQ1’16 vs. 5% last year. Cisco said that sales from the Cat 3850, Cat 3650 and Nexus 9300 grew in the fixed-switching category, Total Fixed-switching revenue grew 10% Y/Y to ~$2.75bn.

Cisco Shows Interest In Acano

Cisco announced its intent to acquire Acano, a privately held company based in London that provides collaboration infrastructure and conferencing software, for $700m. Acano’s hardware and software includes gateways, and video and audio bridging technology that allows customers to connect video systems from multiple vendors across both cloud and hybrid environments. Acano’s technology and expertise would enable Cisco to accelerate development in the areas of interoperability and scalability. Customers would be able to connect from anywhere, a browser on a mobile device to the corporate boardroom.

Source: Google Images

Acano, founded in 2012 has grew at surprising rates, with 170 employees to date, the company grew more than 600% in 2014, and is on track to double its revenues in 2015 as reported by its vice president of sales in July. Cisco will pay $700m in cash and assumed equity awards, plus additional retention based incentives for Acano employees who join Cisco, the transaction is expected to close in Q316. It is also to be noted that Acano has many important customers such as Vodafone, AT&T, Whole Foods and others, which would be moved on to Cisco.

New Software Release

Cisco announced a new software release that enhances ACI with micro-segmentation for both physical and multivendor virtualized applications (on VMW VDS and Hyper-V), and extends ACI across multi-site environments. By virtue of the new capabilities to ACI, the latter now supports automated service insertion for any third party layer 4-7 services. On top of the new software, Cisco also implemented new integration of Dockers. Cisco released new support for cloud automation tools like VMware vRealize Automation and OpenStack, including open standards- based Opflex support with OVS. New members of the ACI ecosystem enable the automation of entire application suites, including PAAS and SAAS, helping organizations to automate across their application and infrastructure teams.

In the press release, Cisco said that it now has more than 5000 N9K ACI-ready customers. This implies that with the new software release, Cisco has pre-sold their product. If the new ACI software is successful and customers are satisfied, this could be a new catalyst in Cisco’s potential growth.

1-Month Chart

Source: Google Finance

Valuation

Our Dec-16 price target for Cisco is $36. Our price target is based on a ~16x multiple to our 2016YE EPS forecast of $2.25. The company continues to deliver strong results across their business.

Algorithmic Analysis

I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 7,000 assets. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

Having explained how I Know First’s algorithm works, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. The three-month and one-year forecasts for Cisco are included.

The stock has a bullish signal for both, indicating that the stock is currently undervalued. Over the predicted time horizons, the stock is currently undervalued, which is in support of the fundamental analysis.

Conclusion

We have a fundamentally Bullish view on Cisco. We believe that the release of the new software combined with the potential Acano Merger will have a good impact on Cisco in the long run. Cisco is a solid company, with a good management team and increasingly good products. We are confident that demand for Cisco’s routers will hold up, enterprise and government spending trends continue to improve, a very important factor related to Cisco’s sales.