Cisco Shares Plunge After Bucking Tide of Tech Optimism

Thursday, 10 Feb 2011 02:41 PM

 

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After disappointing Wall Street quarter after quarter, Cisco Systems Inc. may be losing its status as a tech industry bellwether.

Cisco shares were down 13 percent by midday Thursday and falling margins stoked concerns that competition and dwindling public sector spending are stunting its growth.

Shares of long-time rivals such as Alcatel-Lucent and Juniper Networks Inc., by contrast, were doing just fine — showing investors believe Cisco's problems are its own.

It was the third time in as many quarters that the world's top maker of routers and switches stunned the market with a weak outlook.

Including the market's cautious reaction to Cisco's solid report last May, it would be the fourth straight quarter of post-earnings decline in share price and marks a further divergence from the market's general recovery.

A fall in gross margin to 62.4 percent from the previous quarter's 64.3 percent and a 7 percent year-on-year decline in switching revenue concerned Wall Street most, and overshadowed stronger-than-expected results for the January quarter.

Cisco Chief Executive John Chambers said the shortfall was partly due to customers being in between buying newer switching products and that margins would rebound. Analysts were not entirely convinced.

"CEO Chambers cited pricing pressure resulting from cannibalization by Cisco's own higher performance low-end switches, which we believe is actually a symptom of higher levels of competition," said Morgan Stanley analyst Ehud Gelblum.

EXCEPTION

Investors have long looked to Cisco for signs of overall technology spending due to the breadth of its customer base, which ranges from small U.S. businesses to foreign governments.

But Cisco's recently cautious outlook makes it look like an exception in an otherwise upbeat tech sector.

Even Alcatel-Lucent, a Franco-American rival that has been struggling since a 2006 merger, has been showing signs of turning the business around. It offered an upbeat report Thursday, sending its shares up more than 13 percent to their highest level since October 2009, making them the French CAC 40 index's biggest gainer.

"Cisco was one of the only networking companies to report sequential revenue declines in what was a healthy IT spending environment," Piper Jaffray analyst Troy Jensen said in a report.

"The company is clearly losing share in two significant product categories, with switching sales down sequentially for three consecutive quarters and router sales declining 8.9 percent quarter-over-quarter."

Cisco also faces new competition from such companies as China's Huawei Technologies Co. Ltd. and Hewlett-Packard.

HP, which bought small network equipment maker 3Com, has been offering discounts to customers who trade in Cisco products. Analysts say Cisco is retaliating by lowering prices and offering free financing or pay-later plans.

"We believe Cisco is now being forced to price its newest, higher performance switches at prices equal to or lower than its older products, resulting in a hit to both revenue and gross margin," Gelblum said.

Chambers also warned that public-sector orders will continue to be weak the United States, Europe and Japan, where governments are trying to control their debt.

But with few other tech vendors complaining about weaker public spending, analysts said the issue may be more of a Cisco-specific issue.

Piper Jaffray cut its rating on Cisco shares to neutral from overweight. Stifel Nicolaus downgraded its recommendation to "hold" from "buy," while Credit Suisse cut its price target to $24 from $27.

CHARTS POINT TO DECLINE

Cisco shares fell as much as $3.04, or 13.8 percent, to $19.00 and matched last year's low on Dec. 3. Shares of Juniper rose 5.4 percent to $42.51.

But with Cisco's products playing a key role in expanding Internet and mobile traffic, some investors and analysts say it is still a good long-term investment.

"I'm really grappling with Cisco," said Blaylock Robert Van analyst Joel Achramowicz.

"Quite frankly, Cisco being down $3, I just can't stomach it ... I think the long-term value is inherent in the company. They're making major investments that are going to pay off down the road," he said, adding that he was lowering his recommendation to a "buy" from "strong buy."

Technical analysts pointed to a bearish trend.

"If you went on the chart alone, even before last night's earnings, this is not a good stock chart," said Richard Ross, global technical strategist at Auerbach Grayson in New York. "You have a well-defined downtrend."

Cisco's cycle peaked with the overall market last April. Unlike the Nasdaq 100, which is up nearly 15 percent from its April high, Cisco failed to rally last summer and missed the recovery that has taken the S&P 500 to its highest level since mid 2008.

If shares close below $19, the next technical support comes in around $17.80, where it bounced off to rally in July of 2009.

© 2014 Thomson/Reuters. All rights reserved.

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