Cisco Stock Is Sliding. Street Revenue Forecasts May Be Too High, Says Analyst.
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BofA analyst Tal Liani downgraded shares of networking giant Cisco to Neutral from Buy, but kept a $56 price target.
Angel Garcia/Bloomberg
Cisco
Systems stock is sipping Wednesday amid an otherwise buoyant stock market after BofA Global Research analyst Tal Liani reduced his rating on the networking-infrastructure company to Neutral from Buy, while maintaining his $56 target price.
Cisco stock (ticker: CSCO) is down 0.8% to $51.69, while the
Nasdaq Composite
is up more than 1%. Cisco shares have underperformed the market this year, with a gain of 9%, well below the Nasdaq’s 38% rally.
Liani’s thesis is that Street estimates for Cisco’s product-revenue growth look too high for both the July 2024 fiscal year and for fiscal 2025. His view is that this fiscal year’s expected product revenue growth of 13%, which followed 6% growth in fiscal 2022, has been boosted unsustainably by a draw down on what has been historically high backlog, which accumulated during the component shortages that emerged during the pandemic. Note that product revenue accounted for about 75% of overall revenue in the first nine months of fiscal 2023.
Liani notes that consensus calls for 3% year-over-year product growth in fiscal 2024, and 2% growth in 2025. But he said that would imply product revenue “much higher than historical levels.”
The analyst notes that since fiscal 2012, Cisco’s annual product revenue has ranged from $36 billion to $39 billion, about 80% of that from switches, routers, and Wi-Fi and wireless networking hardware. He says fiscal 2023 product revenue is expected to reach $43 billion, thanks to a $5 billion to $6 billion backlog drawdown—or $37 billion excluding the boost from backlog.
Liani explains that current Street estimates call for product revenue of $44.2 billion in fiscal 2024, and $45.3 billion in fiscal 2025, without further backlog support. He notes that backlog is expected to normalize by the second half of the next fiscal year. His view is that forecasts assume a sharp order recovery—and point to a risk of significant disappointment.
Cisco is likely to report financial results for the fiscal fourth quarter and year in mid-August.
Cisco stock lost ground following its fiscal-third-quarter earnings report in May largely due to a sharp slide in orders—the figure was down 23%, following a 22% drop in the second quarter.
In an interview with Barron’s in May, Cisco Chief Financial Officer Scott Herren said there were three factors built in to the order decline. One factor, he said, is that lead times have come down sharply as component availability has improved. He noted that lead times are down about 40% over the last two quarters. With shorter lead times, he said, customers are less aggressive in their orders.
A second factor, Herren said, is that Cisco’s improved ability to ship products means some customers are in a digestion period, working through completed orders. Not least, he notes that Cisco is seeing an elongated sales cycle for both service providers and other large customers.
“It’s a time to be prudent,” he said.
Write to Eric J. Savitz at eric.savitz@barrons.com
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