Text size
BofA analyst Tal Liani downgraded shares of networking giant Cisco to Neutral from Buy, but kept a price target of $56.
Angel Garcia/Bloomberg
Cisco
Systems shares are sipping on Wednesday amid an otherwise buoyant stock market after BofA Global Research analyst Tal Liani cut his rating on the network infrastructure company to Neutral from Buy, while maintaining its target price of $56.
Cisco stock (ticker: CSCO) is down 0.8% at $51.69, while the
Nasdaq Compound
is up more than 1%. Cisco shares have underperformed the market this year, gaining 9%, well below the Nasdaq’s 38% rally.
Liani’s thesis is that Street’s estimates for Cisco’s product revenue growth appear too high for July 2024 fiscal year and for fiscal 2025. His view is that Cisco’s projected product revenue growth this fiscal year of 13%, which followed growth of 6% in fiscal year 2022, was unsustainably driven by a reduction in what has been a historically high backlog, which has accumulated during shortages of components that have emerged during the pandemic. Note that product revenue represented approximately 75% of overall revenue in the first nine months of fiscal 2023.
Liani notes that the consensus calls for revenue growth of 3% year-over-year in fiscal 2024 and 2% in 2025. But he said that would imply product revenue “much more higher than historical levels”.
The analyst notes that since fiscal 2012, Cisco’s annual product revenues have ranged from $36 billion to $39 billion, of which about 80% comes from switches, routers, and Wi-Fi networking hardware and wireless. He says product revenue for fiscal year 2023 is expected to be $43 billion, driven by a $5-6 billion backlog reduction, or $37 billion without the backlog increase.
Liani explains that Street’s current estimates call for product revenue of $44.2 billion in fiscal 2024 and $45.3 billion in fiscal 2025, without further backlog support. He noted that the backlog should normalize by the second half of the next fiscal year. According to him, the forecast assumes a strong recovery in orders and indicates a risk of significant disappointment.
Cisco is expected to release its financial results for the fourth fiscal quarter and the year in mid-August.
Cisco stock lost ground after its fiscal third quarter earnings report in May, largely due to a sharp drop in orders – the figure fell 23%, after falling 22% in the second quarter.
In an interview with Barrons in May, Cisco Chief Financial Officer Scott Herren said there were three factors built into the drop in orders. One factor, he said, is that lead times have dropped sharply as component availability has improved. He noted that delivery times have decreased by around 40% over the past two quarters. With shorter lead times, he said, customers are less aggressive in ordering.
A second factor, Herren said, is that Cisco’s improved ability to ship products means some customers are in a digestion period, working on completed orders. Last but not least, he notes that Cisco is experiencing an extended sales cycle for service providers and other large customers.
“Now is the time to be careful,” he said.
Write to Eric J. Savitz at eric.savitz@barrons.com