The rapid rise of artificial intelligence (AI) stocks has resulted in some significant stock price rises, prompting investors to go in search of the next potential AI-winning stock.
Analysts at both Deutsche Bank and Morgan Stanley have highlighted one stock that they believe could be the next near-term outperformer.
Deutsche Bank is bullish on CSCO
In a research note on Monday, Deutsche Bank analysts said CSCO is a Catalyst Call Buy Idea. The bank sees a more favorable risk/reward skew for Cisco (NASDAQ:CSCO) shares in the near term.
Deutsche Bank said it views Cisco's upcoming Investor Day on 6/4 as the primary catalyst, with the company likely to provide refreshed long-term targets. Furthermore, they expect the company to spotlight its improved scale/platform value (across Networking/Security/Observability), alongside potential updates on AI targets/customer demand.
Elsewhere, Deutsche Bank noted that investor sentiment towards CSCO is weak and expectations are low following two negative resets. The stock’s “valuation is depressed at a 35% discount to the S&P,” stated the bank.
“This 35% discount is at the low end of Cisco's historical discount range (which has been in the 25-35% range over the last five years), while we see lower downside risk to core estimates following last quarter's guidance cut,” they wrote.
Furthermore, the firm believes the recently closed Splunk (NASDAQ:SPLK) acquisition has positive attributes that could improve sentiment on shares in upcoming months.
Morgan Stanley sees too much value in Cisco stock
Morgan Stanley resumed Cisco at Overweight with a $58 price target, saying that the path towards the valuation gap is closing.
The bank stated that Cisco is trading at a near-record discount to S&P despite their CIO survey noting a healthy growth environment for networking once we get past inventory digestion.
“Given end-market growth, we see Cisco with double-digit overall shareholder return potential, making valuation discount too harsh,” wrote Morgan Stanley. “Cisco has generally traded relatively in-line with the S&P on a total returns basis, with the performance really only starting to lag meaningfully in the last six months, missing end-market growth potential as inventory clears throughout CY.”
The investment bank believes that if the momentum trade were to revert or the market believes that Cisco's earnings have stabilized, there would likely be a catch-up trade for Cisco, which is why they are comfortable stepping back in before estimates are derisked for Splunk on the FQ3 earnings report.
The catalyst for positive estimate revisions is likely six months out, but there are multiple potential catalysts to story, according to Morgan Stanley.
When it comes to AI, the bank feels that the current CSCO multiple reflects little credit for this potential AI winning stock.
The bank added, “Cisco highlights the $1bn+ of orders they expect to get in FY25 in this business, with much of that converting to revenue in FY25.”
“We think Enterprise reach could mean that there is an AI story here, as inference uses grow.”