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So far this year, the FTSE 100 is up 9.59%. That’s not a bad result, but accross the pond there are stocks in the Dow Jones index that are crushing it. I spotted one that’s up almost 60% over the same time period. When digging a bit deeper, I believe there’s scope for it to continue to move higher. Here’s why.
Reinventing itself
I’m talking about Cisco Systems (NASDAQ:CSCO). For many years, Cisco was viewed as one of the technology sector’s dependable but rather uninspiring veterans. I’ve used their hardware products in the past, but wouldn’t describe it as a hot tech stock.
More recently, however, Cisco has transformed itself into far more than a hardware provider. Through acquisitions such as Splunk, alongside expanding AI-optimised networking solutions, the business is now becoming a key part of the current large infrastructure investment cycle. Put another way, if Nvidia is supplying the engines powering artificial intelligence, Cisco is increasingly building the roads those engines need to drive on.
That shift is the key reason, in my view, why the shares have climbed 60% this year. It’s true that much of the attention in AI has focused on semiconductor manufacturers. But stocks like Cisco have also benefitted massively, as investors have recognised that AI workloads also require enormous amounts of networking equipment.
Results to back it up
Talk can be cheap, but recent financial results back up these thoughts. Third-quarter revenue rose 12% to a record $15.8bn, fuelled by networking product orders accelerating by more than 50%. AI infrastructure orders from hyperscale customers reached $5.3bn for the current fiscal year.
More importantly, management raised its full-year AI order expectations from $5bn to $9bn, signalling demand is arriving considerably faster than previously anticipated.
The road ahead
There’s a lot of chatter at the moment about the scale of AI investment and if it’s going to pay off. Yet, for Cisco, this doesn’t matter too much right now. It’s most bothered about investment contiuning, as it’ll create a much larger addressable market for Cisco’s switches, optics, and security solutions.
If I’m correct and we do see AI infrastructure spending remain elevated for several more years, Cisco appears well positioned to participate in virtually every stage of the network build-out rather than relying on one individual product cycle.
That said, there are risks investors should not ignore. Expectations have risen sharply following this year’s rally, giving the stock a price-to-earnings ratio of 35.81. The Dow Jones average ratio is 22.42, so clearly the stock could be considered overvalued.
The other main risk is if AI infrastructure spending slows. The buildout is arguably the main factor driving the stock rally, and so if this doesn’t materialise at the pace we expect, the share price could struggle.
Even with those concerns, I still think the oulook is bright for the stock. On that basis, I’m considering adding it to my portfolio and feel investors could consider doing the same.
Should you invest £5,000 in Cisco Systems right now?
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Jon Smith does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
