Cisco stock takes a dive after earnings but analyst says ‘there’s nothing wrong here’
Meeting expectations wasn’t good enough for Cisco Systems Inc., as the company continued to reference a “pause” in customer spending due to macroeconomic uncertainties.
Chief Executive Chuck Robbins told investors on Cisco’s CSCO, -5.96% earnings call late Wednesday that customers were “still fully planning on moving forward” but also that they were “just a little cautious and trying to see what’s going on.” The company still managed to slightly beat analysts’ projections for its December quarter.
Opinion: Cisco’s customers are still on ‘pause’ amid coronavirus scare and layoffs
Shares were off 6% in morning trading Thursday, a day after closing at a five-month high, though Cisco found some defenders in the analyst community.
See more: Cisco stock falls as results slightly exceed estimates
“In our view, there’s nothing wrong here,” wrote Jefferies analyst George Notter. Though Cisco’s business is getting caught up with “negative macro influences,” he believes the company will start facing easier comparisons in the coming quarters, helping drive a return to “GDP-plus normalized growth.”
Notter argued that Cisco is “turning the corner” with some of these headwinds, pointing to commentary from management around how recent political developments could “hopefully” make customers pick up their spending again.
He rates the stock a buy while raising his price target to $54 from $52.
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RBC Capital Markets analyst Robert Muller also said that macro uncertainty could “soon” subside, though the outbreak of the novel coronavirus that is believed to have originated in China late last year represents a new unknown.
“We continue to view the partial trade resolution from Phase 1 as well as completion of Brexit as being significant removals of macro uncertainty,” Mahaney said. “Cisco’s customers are still demonstrating elongated decision-making cycles, however, management expects spending to recover as/when uncertainty fades.”
That said, Muller also flagged that the past quarter was a tough one for Cisco’s campus and data-center switching businesses, with the data-center weakness “seeming to go against the grain of recent positive cloud results.” He argued that this could be a negative signal heading into Arista Networks Inc.’s own earnings report after Thursday’s closing bell.
Muller rates Cisco shares at outperform with a $55 target price.
Needham analyst Alex Henderson is “breathing a sigh of relief” after the report, writing that Cisco’s outlook “could have been much worse.” He argued that Cisco could have cited the coronavirus outbreak as reason for a “much more” conservative forecast but flagged that management instead talked up better purchasing sentiment toward the end of the quarter, a trend that the company expects will improve as the year progresses.
Henderson has a hold rating on Cisco’s shares.
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William Blair’s Jason Ader took a more downbeat view, however, asking whether the macro issues were the only thing slowing Cisco down. He also has some doubt about management’s optimism that big-picture technology transitions, including Wi-Fi 6 and the shift to cloud security, will be catalysts down the road even if they are causing some disruption in the near term.
“While Cisco management believes that the company is well positioned to capitalize on these transitions, our concern is that they could open the door to new competition and/or pressure Cisco’s legacy businesses in each category, leading to market share erosion over time,” wrote Ader, who has a market perform rating on the shares.
At least five analysts raised their price targets on Cisco’s stock after the report, while at least two lowered theirs, according to a FactSet count. Of the 26 analysts tracked by the service who cover Cisco’s stock, 14 have buy ratings and 12 have hold ratings. The average price target listed for the stock is $52.86.
Shares have added 3.2% over the past three months, through Wednesday’s close, as the S&P 500 index SPX, -0.36% has advanced 9.3% and the Dow Jones Industrial Average DJIA, -0.61% has increased 6.7%.
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