Why This Analyst Is Staying on the Sidelines on Cisco

Cisco Systems Inc. (NASDAQ: CSCO | CSCO Price Prediction) has been one of the weakest components of the Dow Jones industrial average so far in 2019, and according to one analyst this might not change anytime soon. A Nomura Instinet report is somewhat ambivalent on the stock despite Cisco’s recent unveiling of a new chipset family.

At its “Future of the Internet” launch event, Cisco unveiled a new chipset family and new operating system. According to Nomura, Cisco’s arguably overdue vision includes a single chipset family and a new software stack, and ultimately integrated optics will be a best-in-class platform across routing, switching and optical markets.

In a daring shift, Cisco will sell components directly on the merchant market. Nomura points out that it is generally skeptical of the link between announced technical leaps and financial performance. However, the firm also acknowledged the broad technical vision, bold new sales motion and strong customer partnership (including webscale) evident in the launch.

Nomura detailed in its report:

Five years of effort led to a chip family with leading performance and power metrics across switching and all routing classes (access, edge, core) for webscalers and operators. Cisco said many thought it impossible. It may well be, at least on a single chip; Cisco will have many variants of the Silicon One family. Nevertheless, Cisco’s suite is a commanding vision. The first chip, the Q100, will power the new Cisco 8000 router, which is due in early 2020.

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Accordingly, a single software development kit across the chipset family should reduce future development time and customer operating expenses. Cisco said that it expects 39% lower operating expenditures and a 66% lower total cost ownership from the new 8000. The new software suite, IOS XR7, is different from what runs Cisco’s installed equipment and thus benefits should accrue slowly.

The earliest applications of the Q100/Cisco 8000 appear likely to be within service providers, though Nomura does not expect this to reverse Cisco’s sales declines in its Service Provider segment.

Nomura concluded by reiterating a Neutral rating with a $45 price target, implying miniscule upside from the most recent closing price of $44.28.

Shares of Cisco traded up about 2.5% to $45.40 on Thursday, in a 52-week range of $40.25 to $58.26. The consensus price target is $52.12.

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