The tech sector’s landscape in 2025 has witnessed a surprising turn of events. While many high-flying tech darlings have stumbled, established players like Cisco Systems Inc., International Business Machines Corp. (IBM), and Oracle Corp. are experiencing a resurgence, demonstrating their capacity to thrive in the burgeoning field of artificial intelligence (AI).
These legacy companies are attracting renewed investor interest due to their more attractive valuations, healthy dividend yields, and their potential within the AI growth narrative. This contrasts with the more widely recognized AI leaders, who now face higher expectations after a period of sustained outperformance. The uncertain economic climate, marked by fluctuating interest rates and trade tensions, further amplifies the appeal of these established firms.
Stephen Bersey, head of technology research at HSBC, notes that these mature companies offer stability and desirable defensive characteristics during times of economic uncertainty. Simultaneously, the increasing demand related to AI is bolstering their growth, which had previously plateaued.
Cisco, a prime example of this trend, recently exceeded expectations with its latest earnings report. The company highlighted strong demand linked to the development of AI infrastructure, propelling its stock price to its highest point since the dot-com boom.
While the “Magnificent Seven” tech giants have spearheaded the S&P 500’s AI-driven rally, legacy tech companies have lagged behind. However, recent performance indicates a shift in momentum. Cisco has seen a 10% increase year-to-date, IBM has surged by 19%, and Oracle has risen by 5.9%. In contrast, the Bloomberg Magnificent 7 Total Return Index shows a modest 2% gain, with Apple Inc., Microsoft Corp., Alphabet Inc., and Tesla Inc. all in negative territory for the year. Nvidia Corp., the leading chipmaker in the AI boom, has recorded a 6.2% increase.
Wall Street is increasingly recognizing the potential of these revitalized tech giants. IBM, after a prolonged period of stagnation, has experienced significant growth in recent months, fueled by strong revenue projections and a surge in AI-related bookings. Analyst Ben Reitzes of Melius Research highlights IBM’s transformation, noting its consistent performance, strategic software acquisitions, and projected growth exceeding 5%.
Oracle has also undergone a similar revival, solidifying its position as a key player in cloud computing alongside industry behemoths like Microsoft, Amazon.com Inc., and Alphabet.
Comparison of P/E ratios for tech companies
In contrast to the impressive gains of legacy tech companies, the Magnificent Seven’s recent earnings reports have failed to fully convince investors that their substantial AI investments will translate into significant earnings growth in the near future. While Wall Street maintains a largely optimistic outlook on these companies and their long-term AI prospects, their current spending levels and growth rates make it challenging to justify their valuations, which often exceed historical averages.
Legacy tech stocks, however, present a more compelling value proposition. Cisco’s price-to-earnings ratio is less than 17, significantly lower than the Magnificent 7 index’s multiple, which exceeds 30. Moreover, both Cisco and IBM offer attractive dividend yields above 2.5%, a rarity in the tech sector.
Despite Cisco’s recent positive performance, its growth projections remain modest, with revenue expected to increase by 4.8% in fiscal year 2025 and 5% in fiscal year 2026. This growth rate is about half of the projected growth for the overall tech sector, according to Bloomberg Intelligence data.
Nevertheless, these lower valuations might provide a cushion against macroeconomic uncertainties, including inflation, geopolitical tensions, and potential trade wars, particularly if there are further indications that their AI narratives are gaining traction. Ted Parrish, chief investment officer of Parrish Capital, believes that these undervalued, diversified tech companies will continue to outperform, offering earnings stability and a less risky avenue to capitalize on the AI revolution compared to their more expensively priced counterparts. He emphasizes their potential for long-term gains despite their perceived lack of excitement.
This renewed interest in established tech companies signifies a potential shift in the tech sector’s power dynamics. As the AI landscape continues to evolve, these legacy giants are proving their ability to adapt and compete, offering investors a compelling alternative to the high-growth, high-valuation companies that have dominated the market in recent years.
