Cisco is not only an industry leader in network hardware, its performance is used as a benchmark for the industry. They announce their earnings on Wednesday.
Network hardware company Cisco Systems is seen as a bellwether in the technology sector, although the scope of how this tech company is doing extends even further.
There has been a lot of speculation that factors such as tariffs and declining spending for computer networks may weigh heavily enough upon Cisco to cause it to fail to meet estimates in its upcoming earnings announcement on Wednesday.
Analysts take these factors into consideration of course, but demand here may be in a downward trend, and there is more risk with this to disappoint due to the effect of this downward momentum.
During Cisco Systems’ last earnings call, which was a positive one, the company indicated that they were not concerned that these conditions were not likely to slow their growth, even though it is hard to imagine these things not having a meaningful effect, if not a suppressive one.
Many analysts aren’t quite so optimistic, and we have seen this optimism wane since the start of the year, and they see enterprise spending, which affects Cisco’s sales, to be on the way down. Instanet analyst Jeffrey Kvaal, who downgraded the stock last November, observed that “2019 data points have further sapped our confidence in sustained strength in both IT and service provider spending.”
Caution Preached Ahead of Earnings Report
Piper Jaffray’s James Fish also is foreboding, and tells us that “we issue some caution on shares of Cisco into the print given the potential guidance miss.”
If they do meet or exceed expectations with this earnings report though, this would be very good news, flying in the face of what many believe is a shrinking sector and bode well for the tech sector as a whole.
This would also lend support to the current situation not impacting business in general as much as we think, when we get good news from companies who would be more sensitive to their effects due to their exposure, like Cisco Systems.
Cisco has forecast earnings between 71 and 73 cents a share, with the consensus of analysts falling in between at 72 cents. Estimize, a software platform that seeks to predict earnings and is used by the industry, expects earnings of 74 cents. If Estimize’s prediction is correct, this would be a positive thing, although the odds may be on the side of the human analysts in this man versus machine showdown.
Revenue expectations for the company from analysts have dropped from $12.52 billion to $12.41 currently. Cisco has told us it is predicting revenue in the range of $12.48 to $12.72 billion. Estimize has this number at $12.52 billion, right where the analysts had it before it became reduced. Once again, Estimize has us a little on the good side if this is where we end up.
Cisco Also Has Some Potential Bright Spots
It’s not that there aren’t some potential bright spots for Cisco though, and even ones that attract the attention of analysts such as Kvaal who are pretty cautious overall with their recommendations on the company’s near-term prospects.
Kvaal is particularly hopeful about the prospects of Cisco’s new switch program, the Catalyst 9000, which is sold with two-year subscriptions, providing a more reliable revenue stream. The security side of the business also looks promising. “Cat9K and security strength remain bright spots,” remarks Kvaal.
Vijay Bhagavath of Deutsche Bank is more optimistic about Cisco, and has a price target of $60, a 28% move up from where we are now with the stock. He expects a “seasonally strong April and July quarter, and potential for no meaningful downtick in management tone and commentary.” He also is hopeful about the Catalyst 9000, which he deems to be “stronger than expected.”
When we have both potential positive influences along with potentially negative ones, this at least gives us a chance for the positives to overcome these negative influences to where we may end up exceeding expectations. This is where the hope rests for those who are expecting the company to show us that they are indeed handling the challenges of the day and also demonstrating a lot of resilience.
Whether Cisco’s resilience has held up or if it is starting to break down under the pressure is really what will be revealed on Wednesday. Cisco has done well during the current market rally, moving from a low of $40.28 on December 24, to closing at $47.19 on Friday. This 17% move has it outpacing the market over this period and demonstrates real strength in its stock price over a period where we may worry a little more about how businesses such as theirs may hold up.
The actual announcement will set all this straight though, and we’ll get to see who is right. Better than expected news would also lend support for the sector in general, and to some degree, the market as a whole.