We’re starting a new position in a tech stock transforming itself for the AI era
We are initiating a position in Cisco Systems , buying 550 shares at roughly $67.39. Following the trade, Jim Cramer’s Charitable Trust will own 550 shares of CSCO with a weighting of about 1%. We are calling up Cisco from the Bullpen. We added the company to our watchlist on June 23, and the stock has traded mostly sideways since then, buying its time after a strong rally that started as tariff fears eased and continued after a better-than-expected quarter in May. Now that Cisco and the broader market are no longer overbought, we are ready to start this new position. Cisco Systems is a networking equipment powerhouse that has made big strides to improve its artificial intelligence and cybersecurity offerings. Its networking equipment connects all of the powerful computers at the heart of the AI data centers. As computer servers grow more powerful, increasingly sophisticated networking gear will be needed to support and connect it all. When the company last reported its quarterly results, the stock popped nearly 5% on the back of better-than-expected numbers and guidance. The company’s best leading indictor of future revenue and earnings are orders, and there was a surge last quarter — up 20% year over year, or 9% excluding the Splunk acquisition, with growth across all geographies and customers. Even better, the company reached its goal of $1 billion in AI infrastructure orders from webscale (its term for hyperscale) customers one quarter early. This was a major milestone for Cisco. Historically known for serving enterprise customers, Cisco has now demonstrated its ability to tap into the lucrative, fast-growing cloud computing market as well. In June, Cisco announced a number of new innovations for AI data centers that the company says will allow it to deliver “secure, scalable AI infrastructure to drive growth and enable new use cases.” We also like the company’s ongoing transition toward subscription software sales, which is sticky and provides higher-margin revenues. Subscription revenue now makes up about 56% of total revenue, an increase from about 43% less than two years ago. This shift has led to steady gross margin improvement through the years, increasing from 64.6% in fiscal 2022 to an estimated 68.4% this year. This transition should continue to support the stock’s valuation since non-subscription sales can be volatile and less predictable. But at the moment, the company’s valuation is still very undemanding. Its fiscal year 2025 ends in July, so if we look out to fiscal 2026, the stock traded at roughly 17 times the adjusted earnings per share forecast of $4.01. We think there’s potential upside to earnings estimates due to the strength in product orders and service margins. And the stock can continue to re-rate higher off the improving software mix and AI revenues. Finally, Cisco also has a strong track record of returning cash to shareholders. In the most recent quarter, Cisco paid out approximately $3.1 billion in dividends and buybacks. Its current dividend yield is about 2.4% — there’s not many AI plays that offer that degree of cash returns to shareholders. We are initiating the position with a price target of $78, representing roughly 15% upside from current levels. Clarification: This story has been updated to clarify that the Charitable Trust will own 550 shares after Thursday’s trade. (Jim Cramer’s Charitable Trust is long CSCO. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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