Cisco Systems Inc. (CSCO) could follow in the footsteps of Microsoft Corp. (MSFT) as the next old-guard tech titan to succeed in its transition as a leader in new high-growth markets, according to one team of analysts on the Street.  

Bernstein’s Pierre Farragu remains upbeat on San Jose, Calif.-based Cisco's transition away from its legacy switching and routing businesses to segments such as cloud computing, cybersecurity​, the Internet of Things (IoT) and enterprise collaboration.

The analyst reiterated an outperform rating on CSCO along with a $40 price target, indicating a 6% upside from Tuesday afternoon as shares trade up 2.4% at $37.74. Farragu expects Cisco stock, which has seen its value increase 24.8% year-to-date (YTD) versus the S&P 500​’s 17.3% gain over the same period, to go from a multiple of 14 times projected earnings to 20 times. (See also: Cisco Surges to 17-Year High on Revenue Forecast.)

Selling Subscriptions

The Bernstein analyst applauded Microsoft for its pivot to commercial business and its new reliance on the cloud and subscription revenue. The result was “increased monetization of their existing solutions” such as Office, “improving Cloud scale and efficiency” and new revenue streams from segments such as Microsoft’s public cloud platform Azure.

As Cisco doubles down on the cloud and moves its focus away from hardware sales to software revenues, Farragu expects the company to exceed its 2020 targets, see recurring revenues make up over 37% of total sales and subscriptions account for 20% of product sales. In the most recent quarter, subscription product revenue jumped to 12% of sales, an over 100% increase from two years ago. "The 'move to the Cloud' is not the death of Cisco, but rather a great opportunity for the company,” wrote the analyst.

Further, while many warn that software-defined networking (SDN) will steal market share away from Cisco, Farragu sees it as a net positive for the tech giant: “As SDN emerges as a mainstream technology for datacenters and even increasingly for campus environments as well, we see this as actually benefiting Cisco."