Investing.com -- Analysts at Citi have upgraded their rating of Cisco Systems (NASDAQ:CSCO) to "Buy" from "Neutral", citing a larger potential impact from the network equipment maker's artificial intelligence operations.
In a note to clients on Wednesday, the analysts said that although AI currently only accounts for roughly 2% of Cisco's revenues, the company is tipped to see a boost from expected growth in the use of ethernet switches in connecting AI-focused graphics processing units.
Cisco is a key supplier of ethernet switches, which connect devices like computers, laptops, routers and servers with a local area network.
The Citi analysts said they now estimate that ethernet will garner a "high-40s percentage" share of the roughly $10 billion AI switching market, up from their prior projection in the "low 40s percentage". The AI switching market is then anticipated to expand "more rapidly" in 2026, with ethernet's share of it increasing to more than half.
Cisco has estimated that it will receive an additional $1 billion in AI orders in its current fiscal year, while ethernet adoption is due to partly fuel a jump in its hyperscaler AI segment to $9 billion by 2027. This forecast has also likely expanded, the Citi analysts said.
"We see more AI benefiting Cisco's topline as well as the valuation gap [versus] networking peers," the Citi analysts wrote.
They valued Cisco at 16 times its forward 2026 earnings per share, up from their prior multiple of 15 times forward earnings. The analysts argued that, due in part to Cisco's AI opportunities, the shares "warrant less of a discount" to its networking peers that trade at multiples of roughly 25 times forward earnings.
Shares in Cisco rose in premarket US trading on Wednesday.
In August, the group said it was seeing a rebound in demand for networking equipment and unveiled a plan to slash headcount to focus on high-growth areas such as AI and cybersecurity.
(Reuters contributed reporting.)
This content was originally published on Investing.com
