Cisco stock adds more than $10 billion in a day, but is supply or demand driving strong performance?

While at least 13 analysts celebrated that news Thursday morning by raising their price targets on the stock, there were no upgrades as a debate ensued. Cisco’s orders declined by more than 20% even as sales jumped and were predicted to continue rising strongly, which suggested to some that the bright future is just a product of component-supply issues that hurt Cisco last year and have now eased — for the time being.

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“We expect weaker macro to eventually impact Cisco’s top-line growth,” Barclays analysts wrote while maintaining an “equal weight” rating and raising their price target to $52 from $46. “While backlog is still meaningful right now, we do see some risks when visibility returns to normal levels.”

The concern about demand would show up in Cisco’s next fiscal year, when sales growth could slow considerably, especially in comparison with coming growth on the back of the clearing supply chain.

“Unfortunately, strong backlog drawdown in FY23 that should drive growth of ~10% (guide 9.0%-10.5%) creates a challenging dynamic in FY24,” UBS analysts wrote in a note titled “No longer ‘Waiting for Godot’ (backlog impact) to show up in revenue and guidance” that included a price-target increase to $51 from $48. “If Cisco’s product backlog is ‘normal’ in 1H:FY24, growth in FY24 is likely to slow to 2-3% as backlog normalizes by the end of FY24.”

Others found more of a positive read-through on tech demand in 2023. Needham analysts wrote, “The primary question underlying this is the true demand conditions.”

“Cisco, with its January-quarter end, answered this in the affirmative noting January was stronger than the start of the quarter and stronger than expected,” they wrote, maintaining a “hold” rating.

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In a note titled “Boogie on the Network with Cisco Disco,” Evercore ISI analysts suggested that sales cycles getting longer are a concern, but Cisco appears to be handling that change just fine.

“We think Cisco sounded less concerned about macro related softness vs. large-cap tech peers as they see the secular need to invest in networking far outweighs the
macro concerns (more signatures required, but customers are signing off),” they noted, maintaining an “outperform” rating and raising their price target to $60 from $58.

Then there were the analysts who split the difference. Jefferies analysts basically said that the struggles last year and the backlog being released this year did not change what Cisco has been, or what it will be.

“Based on the number of questions Cisco is fielding on order normalization trends, it feels like other analysts and investors remain fixated on these bookings and backlog metrics. As we think about Cisco, we still believe the business is a normalized 2-4% annual grower (with a point of that growth coming from M&A) — just as they’ve been over the past decade,” they wrote, while maintaining a “buy rating” and raising their price target to $56 from $54.

Morgan Stanley analysts, in a note partially titled “It Is More Than Backlog,” said they “acknowledge that most of the revenue outlook raise is driven by expectations of better supply,” but focused on “positive drivers that might be underappreciated from the results and outlook.” They mentioned that Cisco would be on track for positive growth even without the backlogged sales; the backlog is still expected to be double the norm for Cisco headed into the next fiscal year; margin improvements from improving component supply; and continuing progress on recurring-revenue initiative. They reiterated a “neutral” rating and raised their price target to $55 from $54.

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Analysts are still evenly split on Cisco overall: 13 have the equivalent of a “buy” rating on the stock and 13 call it a “hold,” according to FactSet, while there is only one “sell” rating. The price target as of Thursday morning was $56.60, up from $53.86 at the end of January.

Cisco’s stock gain on Thursday pushed it past the S&P 500 index
SPX,
-1.38%
in terms of share performance for the past 12 months. Cisco shares have now fallen 6% in the past 12 months and gained 7% in 2023, while the S&P 500 has declined 7.3% in the past year and increased 8% year-to-date. Thursday’s gain was the strongest of the 30 components in the Dow Jones Industrial Average
DJIA,
-1.26%.