Shares of Cisco Systems Inc. CSCO, -0.63% are off 1.4% in premarket trading Thursday after Morgan Stanley analyst Meta Marshall downgraded the stock to equal-weight from overweight. She wrote that Cisco’s valuation discount relative to the S&P 500 SPX, +0.17% is now approaching historical levels, suggesting to her that future appreciation for the stock would have to come from earnings upside, not multiple expansion. “We remain positively included on the demand environment, but think further multiple expansion will require the company to be further along in software transition and hyperscale contribution,” she wrote. “While we would expect to hear more about both of these at the upcoming Analyst Day, we are not expecting them to be major drivers of earnings growth over the next couple years.” Though hyperscale and software now make up about a third of Cisco’s revenue, Marshall sees “a long way to go before they are more meaningful earnings drivers, keeping the bull case out of reach in the near term.” She raised her price target on Cisco’s stock to $59 from $57 in her note to clients. Shares have risen 8.6% over the past three months as the Dow Jones Industrial Average DJIA, +0.21% has gained 1.3%.
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