The analyst making the call is Kulbinder Garcha, and he reiterated his Underperform rating and downside price target of $20 for Cisco shares. The official estimate from the firm is for Cisco’s third-quarter revenues to fall more than 6% to $11.45 billion, with earnings of $0.47 per share on an adjusted basis. These compare to consensus estimates of $0.48 in earnings per share and revenues of $11.38 billion.
Garcha said:
Cisco will be challenged by product transitions in switching and routing, set-top boxes, weakness in emerging markets and broadly, the emergence of SDN will pressure industry gross profit dollars over time. While Cisco has materially lowered estimates, recent results have indicated a mixed IT spending environment, which creates continued headwinds for the company.
The problem is that this implies more weakness across Cisco’s core business. Garcha sees the revenue from switching down 12% and routing down 10%. Another concern is that adoption of the Nexus 9000 roll-out may be uneven. Emerging market weakness and switching weakness were cited as well.
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Garcha also brought up gross margin issues ahead, in part due to an aggressive pricing approach during the current product transition. It was also brought up that product gross margin hit new lows of 58.8% last quarter. Garcha is concerned that there is still downside risk to his gross margin estimates of 61.2% for the quarter and 62.0% for the year.
There are often two sides to any story. We saw two bullish stances: Yahoo! Finance showed that TheFlyOnTheWall had a defense of Cisco from Pacific Crest and also from Seeking Alpha calling for Cisco to return to $30. After closing at $23.02, the Thomson Reuters consensus price target is $23.84 and the 52-week trading range is $20.22 to $26.49.
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