CSCO Stock: Analyst Has a Dire Warning for Cisco Systems, Inc.

CISCO StockWhat to Expect from CSCO Stock

Cisco Systems, Inc. (NASDAQ:CSCO) reports its second-quarter earnings today. While the Street is generally optimistic, one analyst sees red signals flashing for CSCO stock.

Cisco was a technology heavyweight back in the early 2000s. Just like the hot FANG stocks (Facebook, Amazon, Netflix, Google) of today, Cisco was part of the “big four of 2000”—Microsoft, Dell, Intel, and Cisco. That, however, changed when the dot-com bubble burst. Cisco survived but slowly receded in the shadows as the FANGs took center stage.

However, the tech industry has a history of not remaining loyal to any one company for too long. What’s hot today might be a dud tomorrow. Cisco has managed to remain relevant, if not dominant, by continually evolving. The company also undertakes meaningful partnerships time to time to continue expanding.

The strategy has helped Cisco in beating, or at least meeting, the Street’s estimates in recent quarters. But Kulbinder Garcha of Credit Suisse is skeptical this time.

The Credit Suisse analyst foresees Cisco to be barely meeting expectations today.

According to Garcha, “Near-term IT data points remain mixed largely due to less visibility around service provider spending and global macro [conditions].” (Source: “Credit Suisse Keeps Sell-Equivalent On Cisco Before Earnings,” Benzinga, February 8, 2016.)

Bear in mind that Cisco has reported growth in service provider revenue in the last two quarters after eight quarters of declining growth. However, the macroeconomic headwinds, particularly the strong dollar, remain a threat for Cisco.

The Asia-Pacific region—which includes Cisco’s biggest emerging markets of India and China—is its strongest growth market after the Americas. The strengthening dollar is making cheaper Chinese vendors the more attractive substitutes.

Furthermore, Cisco enjoys market leadership in software-defined networking (SDN) solutions, with its ethernet switches connecting the majority of global customers to the Internet. However, the rise of wireless networking poses a significant threat.

“Despite potential near-term momentum, we remain concerned regarding the impact of SDN threatening what remains the most profitable part of the IT stack,” warns Garcha. (Source: Ibid.)

The analyst is of the view that Cisco also faces threat from rival SDNs, which will cut into Cisco’s gross profits.

The Credit Suisse analyst sees more downside in revenue through 2016. He believes the trend will be similar across the sector for all other players.

Garcha is maintaining an “Underperform” rating on CSCO stock, giving it a price target of $22.00. The stock is currently trading at a small 3.5% premium to Garcha’s targeted price.