Cisco’s stock in Wall Street’s penalty box, with ‘strategic shortcomings’ clear

“Frankly, we find it challenging to push our revenue estimate down as much as they have guided,” Needham analyst Alex Henderson wrote, noting that by his math, networking could be down more than 20% in the fiscal second quarter, down 15% in the fiscal third quarter, and down at least 5% to 10% in the fiscal fourth quarter.

“We think these numbers cement our view that Cisco is losing share in its core business,” Henderson added. The company’s comments suggest to him that the services business is growing, “which in turn implies a decline in product sales that’s even steeper than the revenue guide.”

He has a hold rating on the stock, which was off nearly 10% in Thursday’s premarket trading.

Opinion: Cisco’s brutal forecast shouldn’t end the tech sector’s party

William Blair’s Sebastien Naji was also cautious.

“While the stock in not expensive and Cisco is an execution machine, we believe the company’s strategic shortcomings are becoming more visible, which will make upside to estimates and multiple expansion more challenging in the future,” he wrote, while sticking with a rating of market perform. “Building tailwinds around generative AI will benefit Cisco, but even here continued competitive pressure…could limit upside potential.”

Naji said that the “deployment-related pause in spending may be a contributing factor” to decelerating order growth, though “increased competition and market share losses across a number of product segments are also to blame,” in his view.

Cisco’s management blamed the current weakness on inventory-digestion issues rather than broader macroeconomic problems, but Evercore ISI analyst Amit Daryanani said that the stock could be a “show-me” story for several quarters until investors get more confident about that explanation.

Wall Street likely wants to make sure there isn’t a second shoe about to drop for Cisco, according to Daryanani, who had an outperform rating and $55 target price on the stock.

“We think for value investors that can be patient, the upside here is Cisco can do $4.50-5.00 [in earnings per share after its Splunk acquisition closes],” and the stock could work to the “mid 70s,” Daryanani wrote, “though patience is needed.”

Shares closed at $53.28 prior to Wednesday’s report and were indicating near $48 based on premarket activity Thursday.

Cisco’s commentary served as validation of some fears that Piper Sandler’s James Fish had heading into the report.

“We had concerns a third cut was possible given the environment and that this could be just the start of an enterprise slowdown that may leave weak orders in place rather than re-accelerate as Cisco plans in [the second half of fiscal 2024],” he wrote. “Networking is in a ‘downcycle’ and this print will have negative read-throughs for most of our networking coverage, confirming our view that Cisco and peers’ estimates are too high for 2024-2025.”

Cisco’s deal for Splunk offers “medium-term” potential, according to Fish, “but given the core dynamics, Cisco is likely to remain range-bound given an already lowered valuation.”

Fish lowered his price target to $50 from $57 late Wednesday, while reiterating a neutral rating.