By Bill Peters
Barclays analysts on Wednesday upgraded Arista Networks Inc. but downgraded Cisco Systems Inc., citing differences in international exposure and growth prospects in cloud, campus workspaces and data centers for the network providers.
And with rivals spending more and growing more quickly, they also suggested Cisco /zigman2/quotes/209509471/composite CSCO +0.69% may have become too big to hold on to all its prior market conquests. With more vulnerability to the broader economic backdrop, they saw “little upside near term” for the stock.
The analysts, Tim Long and George Wang, downgraded their rating on Cisco Systems stock to the equivalent of neutral, from the equivalent of buy, and cut their price target on the shares to $46 from $56. That represents a 9% upside over Wednesday prices.
“As the market-share leader in most networking categories, it is more difficult to defend share as companies like (Juniper Networks Inc. /zigman2/quotes/207361368/composite JNPR +2.26% , Arista Networks /zigman2/quotes/206966450/composite ANET +0.19% and Hewlett Packard Enterprise Co. /zigman2/quotes/201998588/composite HPE +2.36% ) increase their focus and investment,” they said.
They said Cisco’s cloud business has “stalled” after making big market-share gains from 2019 to 2021. And they said its pivot toward more software had been slow, and that rivals were growing faster in that space.
“We also see (Cisco) more vulnerable to macro and enterprise risks,” they said. “Our surveys have shown downticks in spending and, although networking has hung in there, some industry experts see 2023 campus networking revenues declining by 4% in 2023.”
With the dollar staying strong compared to other currencies, the analysts also noted that Cisco had around 42% exposure to markets abroad that were “subject to more (foreign-exchange) fluctuations, possibly impacting revenue and margins.” By comparison, Arista Networks had 20% exposure to international markets, they said.
Barclays said it was harder for Cisco to navigate macro economic difficulties with its $52 billion revenue base. And the firm said the network-gear giant had continued to lose share in switching, routing and wireless LAN products.
Cisco stock fell 1.6% to $41.90 on Wednesday.
Barclays also upgraded their rating on Arista Networks stock to the equivalent of buy, from the equivalent of neutral, saying the provider of cloud-networking, switching and routing platforms stood to benefit from “resilient” demand for cloud services and more room for growth in campuses.
“We believe the strong mid-teens growth rate for (Arista) will be sustainable for a few more years,” the analysts said. “We expect market share in the data center switching market to continue to move higher. There are concerns about the cloud vertical, where we model moderation, but we still expect double digit growth.”
They said that Arista had grown to become less reliant on its largest customers, among them Microsoft Corp. /zigman2/quotes/207732364/composite MSFT +0.02% , for sales. And they said Arista held just under 2% market share in campuses, adding they expected “more success” in its segment that serves those workspaces.
“Campus share gains have just begun, and we see a long runway ahead,” the analysts said.
The Barclays analysts kept their $131 price target on Arista, with no changes to estimates. Shares of Arista rose 0.5% on Wednesday.
Arista is down 20% so far this year. Cisco is down 34% over that time. The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.38% is down 19% year-to-date.
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