Cisco Systems was left out of the 2020 tech stock party. Cisco shares fell 7% for the year as the networking infrastructure company struggled through a combination of slower IT spending in the pandemic-triggered economic downturn and a shift in corporate spending toward cloud computing and away from corporate data centers.
But there are rays of hope, and an 8% year-to-date rally in Cisco (ticker: CSCO) shares suggests investors smell a turnaround. With economic activity expected to pick up post-pandemic, investors are warming to enterprise hardware and software vendors. For Cisco, the first promising signs showed up last quarter, even while the numbers continued to demonstrate the deleterious effects of the pandemic.
In the October quarter, revenues were down 9%, but above expectations, and profits likewise were above both guidance and the Street consensus. CEO Chuck Robbins told Barron’s at the time that while the quarter wasn’t great mathematically, it was “better than we thought.” There were pockets of strength, including Cisco’s WebEx videoconferencing business, security products, and campus networking. But revenue from the core infrastructure-platform business was down 16%, and enterprise orders were down 15%.
Cisco reports results for its fiscal second quarter ended in January after the close of trading on Tuesday. The company’s guidance calls for revenue to be flat to down 2% from a year earlier, with non-GAAP profits of 74 to 76 cents a share. The Street consensus lines up with guidance: Analysts see revenue of $11.9 billion, down 0.7%, and non-GAAP profits of 75 cents a share. But with a modest beat, the company could return to top-line growth for the first time since 2019.
Street consensus for product revenue is $8.49 billion, down about 2%, according to data compiled by FactSet. That includes infrastructure platforms revenue–the company’s core hardware business–of $6.2 billion, which would be down 4.5%. Application revenue is projected at $1.4 billion, up a hair from last year. Security products revenue is projected at $833 million, up 11%.
For the April quarter, Street consensus estimates call for revenue of $12.4 billion, up 3% from a year earlier, with non-GAAP profits of 81 cents a share.
The analysts are feeling upbeat about the January quarter.
“Take the over,” Raymond James analyst Simon Leopold wrote last week in a note previewing the quarter. “We think the January quarter meets or even beats our near consensus estimates; we think Cisco can guide above us and consensus. Early checks at resellers and distributors revealed a very wide variance for Cisco, but the net IT spending patterns painted a picture that implies recovery. Negative investor sentiment favorably sets-up the stock. Our thesis focuses on the culture that allows Cisco to evolve with single digit sales growth [above GDP] and healthy cash flow.” He keeps his Outperform rating on the stock.
Oppenheimer analyst Ittai Kidron is similarly optimistic; last week, he reiterated his Outperform rating and inched up his price target to $50, from $45. “Our quarterly channel checks point to improving demand trends in Cisco’s January quarter,” he writes, pointing to positive signs on data center switching, WebEx, security and wireless networks offsetting “mixed” campus switch demand. “Given patterns improving, we view consensus expectations as achievable and believe there’s potential for revenue/EPS upside. Looking ahead, we see demand trends further normalizing … overall, we see a favorable risk/reward scenario ahead.”
Evercore analyst Amit Daryanani on Friday added Cisco to his firm’s “tactical outperform list,” seeing easing earnings comparisons and accelerating demand. He keeps his $54 target price. Daryanani writes that channel checks find “an improved enterprise IT spending environment,” a view consistent with upbeat recent comments from companies like Juniper and F5.
“We see demand improving across both commercial and enterprise markets, while service providers may remain lackluster near-term,” he writes. “From a customer perspective, we see a healthy level of pent up demand that is getting unlocked for on-prem systems … We see the combination of an improved fundamental backdrop, technology transitions [including 5G wireless, Wi-Fi 6, and 400 gigabit switches], demand for security solutions following recent incidents, and M&A contributing to slight upside for April quarter guidance as well.”
Morgan Stanley analyst Meta Marshall last week reiterated her Overweight rating and $54 target price on Cisco shares, and writes that the stock is “our top play on return to work.” She thinks the Street has become too negative on the stock, given a potential boost to earnings from a recovering macro environment and the resumption of office project activity as enterprises prepare to return to work. Marshall is cautious on the January quarter, “given lingering challenges in the demand environment,” but she thinks the stock can grid higher through 2021 given an “overly suppressed valuation.”
Write to Eric J. Savitz at [email protected]
