We recently published a list of Top 10 Trending AI Stocks to Watch. Since Cisco Systems Inc (NASDAQ:CSCO) ranks 6th on the list, it deserves a deeper look.
Wall Street continues to gain momentum amid the latest earnings season and analysts are wondering whether we are still up for soft landing. Mohamed El-Erian, Allianz chief economic advisor, talked about the possibility of a soft landing vs no landing during a program on CNBC. When asked what would it take for the market to have a no-landing scenario, the analyst said:
“I think we need the productivity enhancers from A.I., from life sciences to come earlier, we need to continue to have positive shocks to our labor force. And if we get those two things, you can get the bigger but not hotter economy which actually would be perfect for almost everything you can think of, from households to companies to financial markets.”
The analyst does not rule out the possibility of a recession, however.
“My probability of a soft landing is 55%, and a recession is 30%. A soft landing is the most likely scenario, but it’s not dominant. Why isn’t it dominant? Because we have weakness in the household sector, particularly on the lower-income side, and the Fed has been unpredictable. Just think, Morgan—at the end of July, the Fed didn’t cut rates because everything seemed fine. By the next meeting in mid-September, it cut 50 basis points. And now it’s talking about cautious cuts. So, the Fed needs to be careful.”
For this article we picked 10 trending AI stocks based on latest news. With each company we have mentioned its hedge fund sentiment. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Cisco Systems Inc (NASDAQ:CSCO)
Number of Hedge Fund Investors: 61
Citi Research predicts that capital expenditures for data centers among the leading four cloud companies will surge by 40% year over year, offering a boost to data center interconnect (DCI) providers. The major players in this segment include Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Meta Platforms (NASDAQ:META). Citi anticipates that these firms will ramp up their data center investments by 40% to 50% in 2025.
Citi analysts, led by Atif Malik, noted in an investor report that “we estimate that the AI networking opportunity is expanding beyond the server connection within a data center to AI platforms connecting multiple data centers through DCI.”
Citi named Cisco Systems Inc (NASDAQ:CSCO) as one of the beneficiaries of this spending.
Malik emphasized the challenges of containing AI model clusters within a single data center as their size approaches 300,000 GPUs by 2025, stating that “containing models in one data center unit will not be sustainable in the long term amid constraints related to power, regulations, among others.” Consequently, hyperscalers are increasingly adopting and planning to expand the use of a multi-data center training approach.
Citi highlighted that Google has utilized this multi-data center strategy for training its Gemini 1 Ultra, and that OpenAI, Microsoft, and Anthropic are also embracing this model. As a result of increased DCI spending, Citi projects that Arista’s revenue could grow by up to 25% year over year in 2025, primarily driven by Ethernet switching in AI networks.
Cisco Systems Inc (NASDAQ:CSCO) earlier this year announced a major restructuring plan that includes a 7% reduction in workforce and an estimated $1 billion in pre-tax cost savings. Cisco Systems Inc (NASDAQ:CSCO)’s legacy hardware businesses have been stagnating, with average revenue growth lingering at just 1.6%. Job cuts and cost savings will allow Cisco Systems Inc (NASDAQ:CSCO) to allocate capital to high-growth areas like AI and Cloud networking.
The expected cost savings, which will cut about 2.4% of total operating expenses, could boost Cisco Systems Inc (NASDAQ:CSCO) operating margins by more than 220 basis points in FY25. Although the company is ramping up its AI efforts, it only expects AI to bring in around $1 billion in revenue next year, less than 2% of the total. So, while AI isn’t likely to be a game-changer for Cisco Systems Inc (NASDAQ:CSCO) just yet, the focus on growth markets might accelerate overall revenue in the future.
Parnassus Value Equity Fund stated the following regarding Cisco Systems, Inc. (NASDAQ:CSCO) in its Q2 2024 investor letter:
“During the second quarter, the Fund’s overweight position in the Information Technology sector decreased slightly as we sold our position in Cisco Systems, Inc. (NASDAQ:CSCO) and used most of the proceeds to buy Broadcom, a leading semiconductor company and provider of custom silicon products. Both stocks provide similar exposure to networking technology, but we believe Broadcom offers more upside from AI infrastructure spend and defensiveness due to its software assets.”
Overall, Cisco Systems Inc (NASDAQ:CSCO) ranks 6th on Insider Monkey’s list titled Top 10 Trending AI Stocks to Watch. While we acknowledge the potential of Cisco Systems Inc (NASDAQ:CSCO), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CSCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
