Cisco's AppDynamics Deal Merits A Maintained Overweight Rating, Says Pacific Crest

On Tuesday, Cisco Systems, Inc. (NASDAQ: CSCO) announced its intention to acquire AppDynamics, a privately held Application Intelligence Software company, for ~$3.7 billion. “AppDynamics is a natural fit for Cisco's portfolio,” Pacific Crest’s Alex Kurtz said in a report. He maintains an Overweight rating on the company, with a price target of $33.

To Integrate With Cisco's IoT And Applications Business

AppDynamics would be integrated with Cisco’s IoT and Applications business. The privately-held firm would complement Cisco's portfolio, given “its ability to monitor legacy applications and infrastructure and its growing presence in next-generation application deployments,” analyst Kurtz noted.

The acquisition would broaden Cisco's software portfolio as the company “attempts to diversify its revenue base with more subscription and recurring revenue,” Kurtz added.

Implications For The Value Of New Relic

“We believe the $3.7 billion price represents roughly 10x the calendar 2018 revenue estimates the Street was likely to give AppDynamics if it went public,” the analyst pointed out. He further commented that the acquisition premium indicated the importance of the application performance management space.

Kurtz expects New Relic Inc (NYSE: NEWR) to generate at least $386 million in revenue in 2018, and there was “significant upside potential,” while its stock was trading at only 3.9x 2018 calendar revenue.

Given the momentum of cloud and digital deployments, there seems to be adequate room for both AppDynamics and New Relic to perform well. “We certainly view the acquisition of AppDynamics as another positive for NEWR and would be buyers of shares,” the analyst stated.