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Cisco is the big tech stock to buy for low China trade risk, Bank of America says

Key Points
  • "We flag Cisco's relatively low exposure to China, which is particularly attractive in the current market environment," Bank of America said.
  • Cisco's stock was on the low end of the range of big tech stocks hit over the past week by trade fears.
  • Bank of America believes Cisco will bounce back from its recent drop, saying the stock has "room for upside."
Cisco logo exhibited during the Mobile World Congress, on February 28, 2019 in Barcelona, Spain.
NurPhoto | Getty Images

Bank of America highlighted Cisco Systems on Tuesday, pointing to the company as having lower risk compared to other tech stocks from the escalating U.S. trade war with China.

"We flag Cisco's relatively low exposure to China, which is particularly attractive in the current market environment," Bank of America's Tal Llanl said in a note to investors.

The biggest tech stocks, known as FAANG – Facebook, Apple, Amazon, Netflix and Google-parent Alphabet – have been among the hardest hit by trade risk, falling anywhere between 4% to 8% each over the past week.

Only 3.3% of Cisco's revenue comes from China, according to FactSet. The average revenue from China among FAANG companies is 7.5% – although that is heavily influenced by Apple and Netflix. The two tech giants respectively bring in 18.3% and 10.3% of total revenues from China.

Cisco shares have fallen 4% in the past week, at the low end of the range compared to FAANG stocks. Bank of America believes Cisco will bounce back from its recent drop, saying the stock has "room for upside."

"Cisco has been actively shifting contract manufacturing and pricing to offset the previous 10% tariffs on Chinese-produced goods, and we expect such workarounds to also help soften the recent tariff increase to 25%," Llanl said.

"Separately, we note that backlash versus Huawei's products in certain regions may help Cisco indirectly," Llanl added.

Cisco shares rose 1.9% on Tuesday to $52.26.

Bank of America expects Cisco's strong earnings performance in its first two quarters "to continue," with the company set to report third quarter earnings on Wednesday. The firm has a $56 a share price target on Cisco.