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Aug. 17, 2019, 9:28 a.m. EDT

Cisco’s stock had its worst single-day drop in almost six years

Cisco could see ‘another shoe’ drop after weak outlook, says analyst

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By Emily Bary and Jon Swartz

Bloomberg News/Landov
Cisco’s downbeat outlook has some analysts concerned about spending patterns and macroeconomic issues.

Cisco Systems Inc.’s weak revenue forecast for the current quarter weighed heavily on the networking giant’s shares Thursday -- they plunged the most in one day in nearly six years -- and some analysts see further pain in store.

Instinet analyst Jeffrey Kvaal thinks there could be “another shoe to drop” in the current fiscal year, which just began a few weeks back. While Cisco’s /zigman2/quotes/209509471/composite CSCO +4.88%  management team “appeared unruffled by enterprise demand,” in Kvaal’s view, he has numerous concerns about the spending environment.

See more: Cisco stock drops after earnings include weak guidance

“China may weaken further, public sector seems above trend, and enterprise macro concerns may deepen,” wrote Kvaal, who has a neutral rating on the stock and bumped his price target down to $47 from $53.

Cisco’s stock drooped 8.6% to $46.25 in trading Thursday in its worst single-day drop since Nov. 14, 2013, when the stock plummeted 11%. It was the worst performing stock on the Dow Jones Industrial Average.

Opinion: Cisco’s weak outlook stokes fears of slowdown in tech spending, but 5G may offer light at end of the tunnel

Needham analyst Alex Henderson sees Cisco’s business drivers “ebbing” and doubts that 5G will be a meaningful catalyst for the stock “any time soon.” While Henderson views macroeconomic issues as a source of pressure, he also worries that Cisco-specific problems could continue.

“Cisco has benefited from a major upgrade cycle in Campus that is now approaching three years old,” he wrote. “We think price hikes are poised to annualize and acquisition contributions should ease. The decline in tax rates is annualizing and Cisco’s share buybacks need to slow to that of issuance unless the company wants to take on debt to fund them.”

Henderson has a hold rating on the shares.

Read: Cisco cuts nearly 500 jobs in Silicon Valley

Oppenheimer’s Ittai Kidron took a more mixed view. “While we believe Cisco’s strong product cycle and software transition can help it navigate a choppier environment, we nonetheless expect shares to remain rangebound as investors digest lower growth expectations and the moderation in buyback activity,” he wrote. Kidron has an outperform rating and $60 target on the stock.

In lowering his price target to $60 from $65, FBN Securities’ Shebly Seyrafi expressed concern about a “challenging service provider business” -- especially in China, which, although a small slice of Cisco’s business, made an impact. He did maintain an Outperform rating, however, because subscriptions grew to 70% of software sales, switching grew by a double digits year-over-year, security improved 14%, and applications rose 11%.

See also: NetApp stock rises on better-than-feared results

Others came to the company’s defense following the downbeat outlook.

“Cisco has traditionally been very conservative when they’ve reduced expectations,” wrote Jefferies analyst George Notter, who rates the stock a buy but lowered his price target to $54 from $62. “Historically, their upsets relative to consensus have been followed by several quarters of outperformance. In our view, the 0-2% year-over-year growth guidance for the October quarter likely contains a healthy dose of conservatism – even with the increased macroeconomic uncertainty we’re seeing right now.”

Industry analyst Glenn O’Donnell, who covers Cisco for Forrester Research, warns of risk for Cisco’s sweet spot , enterprise networks. “It will undoubtedly continue its overwhelming dominance there, but that dominance isn’t what it once was,” O’Donnell told MarketWatch. “It is facing some serious competition for the first time in many years” from Arista Networks Inc. /zigman2/quotes/206966450/composite ANET +4.73% , Hewlett Packard Enterprise Co. /zigman2/quotes/201998588/composite HPE +1.25% , and VMware Inc. /zigman2/quotes/209864107/composite VMW +9.71% .

Shares have risen 6.7% so far this year, as the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07%  has climbed 9.7%.

US : U.S.: Nasdaq
$ 47.82
+2.23 +4.88%
Volume: 43.57M
May 29, 2020 4:00p
P/E Ratio
Dividend Yield
Market Cap
$202.80 billion
Rev. per Employee
$ 233.46
+10.54 +4.73%
Volume: 962,561
May 29, 2020 3:59p
P/E Ratio
Dividend Yield
Market Cap
$17.67 billion
Rev. per Employee
$ 9.71
+0.12 +1.25%
Volume: 23.84M
May 29, 2020 4:00p
P/E Ratio
Dividend Yield
Market Cap
$12.45 billion
Rev. per Employee
$ 156.27
+13.83 +9.71%
Volume: 5.20M
May 29, 2020 4:00p
P/E Ratio
Dividend Yield
Market Cap
$65.32 billion
Rev. per Employee
US : Dow Jones Global
-17.53 -0.07%
Volume: 545.14M
May 29, 2020 5:14p

Emily Bary is a MarketWatch reporter based in New York. Jon Swartz is a senior reporter for MarketWatch in San Francisco, covering many of the biggest players in tech, including Netflix, Facebook and Google. Jon has covered technology for more than 20 years, and previously worked for Barron's and USA Today. Follow him on Twitter @jswartz.

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