Macquarie: Sell Cisco

In a report published Tuesday, Macquarie analyst Rajesh Ghai initiated coverage of Cisco Systems, Inc. CSCO with an Underperform rating and price target of $26. Although the company is expected to report strong quarterly results, the analyst expressed concerns regarding the longer-term trends.

"While we have no doubt that Cisco is likely to navigate the market and technology transitions a lot better than its large system vendor peers, our analysis of Cisco's product markets, in particular L2-3 Switching and the Service Provider vertical, suggest forward street estimates may be too optimistic at this point of time," Ghai explained.

The enterprise switching market is expected to contract in the near future, driven by a combination of more CPU cores/virtualization, service providers adopting SDN.NFX, migration of enterprise server workload to the cloud/hyperscale, and wireless/mobility growth, which could lead to decline in the overall switch port demand.

"We also remain concerned that the headwinds faced by the company in the Service provider market over the past few years may strengthen further and emerging markets with the exception of a few countries may remain tepid for the most part," the Macquarie report mentioned.

In addition, the analyst also expressed uncertainty regarding Cisco's ability to make a significant impact with its Intercloud strategy, while adding that the consensus expectations did not currently reflect these concerns and that the company was likely to witness flat earnings growth in FY2016.

On the positive side, Ghai commended the management team, stating that it was "unlikely to miss a beat following John Chambers' recent retirement." Also, the Servers, Wireless and Security business are likely to offer avenues for growth that could possibly offset any softening in the Switching, Routing and SP video businesses.

"Growing software and services content could be a source of margin upside," Ghai said, while adding, "A ramping solution approach to selling could help the company leverage its broad portfolio better while driving a greater share of the wallet."