Cisco Systems Inc.’s weak revenue forecast for the current quarter weighed heavily on the networking giant’s shares Thursday — they plunged the most in one day in nearly six years — and some analysts see further pain in store.
Instinet analyst Jeffrey Kvaal thinks there could be “another shoe to drop” in the current fiscal year, which just began a few weeks back. While Cisco’s CSCO, -8.61% management team “appeared unruffled by enterprise demand,” in Kvaal’s view, he has numerous concerns about the spending environment.
“China may weaken further, public sector seems above trend, and enterprise macro concerns may deepen,” wrote Kvaal, who has a neutral rating on the stock and bumped his price target down to $47 from $53.
Cisco’s stock drooped 8.6% to $46.25 in trading Thursday in its worst single-day drop since Nov. 14, 2013, when the stock plummeted 11%. It was the worst performing stock on the Dow Jones Industrial Average.
Needham analyst Alex Henderson sees Cisco’s business drivers “ebbing” and doubts that 5G will be a meaningful catalyst for the stock “any time soon.” While Henderson views macroeconomic issues as a source of pressure, he also worries that Cisco-specific problems could continue.
“Cisco has benefited from a major upgrade cycle in Campus that is now approaching three years old,” he wrote. “We think price hikes are poised to annualize and acquisition contributions should ease. The decline in tax rates is annualizing and Cisco’s share buybacks need to slow to that of issuance unless the company wants to take on debt to fund them.”
Henderson has a hold rating on the shares.
Oppenheimer’s Ittai Kidron took a more mixed view. “While we believe Cisco’s strong product cycle and software transition can help it navigate a choppier environment, we nonetheless expect shares to remain rangebound as investors digest lower growth expectations and the moderation in buyback activity,” he wrote. Kidron has an outperform rating and $60 target on the stock.
In lowering his price target to $60 from $65, FBN Securities’ Shebly Seyrafi expressed concern about a “challenging service provider business” — especially in China, which, although a small slice of Cisco’s business, made an impact. He did maintain an Outperform rating, however, because subscriptions grew to 70% of software sales, switching grew by a double digits year-over-year, security improved 14%, and applications rose 11%.
Others came to the company’s defense following the downbeat outlook.
“Cisco has traditionally been very conservative when they’ve reduced expectations,” wrote Jefferies analyst George Notter, who rates the stock a buy but lowered his price target to $54 from $62. “Historically, their upsets relative to consensus have been followed by several quarters of outperformance. In our view, the 0-2% year-over-year growth guidance for the October quarter likely contains a healthy dose of conservatism – even with the increased macroeconomic uncertainty we’re seeing right now.”
Industry analyst Glenn O’Donnell, who covers Cisco for Forrester Research, warns of risk for Cisco’s sweet spot , enterprise networks. “It will undoubtedly continue its overwhelming dominance there, but that dominance isn’t what it once was,” O’Donnell told MarketWatch. “It is facing some serious competition for the first time in many years” from Arista Networks Inc. ANET, -1.25%, Hewlett Packard Enterprise Co. HPE, -1.40%, and VMware Inc. VMW, -7.02%.
Shares have risen 6.7% so far this year, as the Dow Jones Industrial Average DJIA, +0.39% has climbed 9.7%.
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