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Cisco Systems Inc. shares fell Wednesday as investors debated how much the company’s outlook reflected industry-wide component shortages and challenges posed by millions still working from home as the COVID-19 pandemic approaches a one-year milestone.
Late Tuesday, Cisco CSCO, -3.55% reported quarterly results that topped Wall Street expectations but issued an outlook that many considered to be weak considering the April-ending quarter has one more week than the year-ago quarter.
The maker of network equipment, videoconferencing tools and security software forecast a 3.5% to 5.5% year-over-year increase in revenue, or a range between $12.38 billion and $12.68 billion, for the April-ending quarter.
“Investors aren’t too thrilled right now,” said Patrick Moorhead, principal analyst at Moor Insights & Strategy. “I attribute this to its recent run-up and ‘selling on the news’ philosophy.” Cisco shares had advanced 9% in February leading up to Tuesday’s earnings report, and fell nearly 6% in Wednesday trading.
Of the 26 analysts who cover Cisco, 12 have buy ratings on the stock, and 14 have hold ratings, according to FactSet. Of those, eight hiked their price targets, raising the average price target on the stock to $51.80 from a previous $49.76, according to FactSet data.
Read: Cisco faces uncertainties as many continue to work from home
J.P. Morgan analyst Samik Chatterjee, who has a neutral rating and a $50 price target, said that limited chip supplies that are effecting the whole industry will moderate how well enterprise spending recovers. He also said he was “modestly disappointed.”
Chatterjee said if you factor out the extra week, Cisco’s outlook “implies only a
seasonal increase in revenues, rather than above seasonal trends helped by the
recovery.”
Raymond James analyst Simon Leopold, who has an outperform rating and a $50 price target, also cited the extra week in the outlook as making it appear “inadequate,” and said it was likely weighing on the stock price. Leopold also cited chip supply constraints as a factor for weakness in the shares.
“Demand and orders are improving, but component shortages, the pandemic and exchange rates present challenges,” Leopold said.
Citi Research analyst Jim Suva, who has a neutral rating and raised his price target to $50 from $45, said Cisco’s results and call “was the most positive we’ve heard in a year.”
“So why do we have a neutral rating?” Suva asked. “After adjusting the outlook for an extra week, the outlook is in line and we are not sure what the new return to work life will be like and will enterprises indeed upgrade or are current solutions sufficient,” he said.
UBS analyst David Vogt, who has a neutral rating and raised his price target to $45 from $41, said investors are likely to take a wait-and-see approach when it comes to Cisco, given the company’s Catalyst 9000 switches which require a subscription.
“While near-term strength in Cat9K (double digit growth) and Webscale (triple digit growth) was solid, these two offerings likely masked mid-single digit revenue declines across the rest of Cisco’s portfolio based on our analysis,” Vogt said.
“As such, we believe Cat9K subscription renewal cadence in fiscal 2H is a critical metric to monitor as it sets the stage for a meaningfully larger wave of renewals hitting in FY22,” Vogt said.
Over the past 12 months, Cisco shares are down 5%, versus a 7% advance by the Dow Jones Industrial Average DJIA, +0.43%, of which Cisco is a component, a 17% rise by the S&P 500 index SPX, +0.21%, and a 45% gain by the tech-heavy Nasdaq Composite Index COMP, +0.11%.
