Bernstein Looks Into What To Make Of Cisco's Switching Losses

Bernstein analyst Pierre Ferragu believes Cisco Systems, Inc. CSCO can defend and even slowly grow its switching revenues, despite share losses in the high end.

Investors are concerned with market share losses of Cisco in switching business, which represents about 30 percent of revenues and about 35 percent of gross profits for the company.

Market Share And Switching Business

Though Cisco dominates in both the campus and traditional datacenter switching markets, the lumpiness in advanced datacenter market is driving share losses.

The vast majority of growth within the datacenter segment comes from the "Advanced" segment which includes hyperscale companies deploying enormous datacenters at the core of their business (i.e., internet giants.)

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In this segment, Cisco is losing share to Arista Networks Inc ANET, Juniper Networks, Inc. JNPR, or in-house White-Box solutions as these hyperscale players and others with similar needs do not value much the default platform position of Cisco. Currently, Cisco has about 35 percent share in this market.

“Cisco has continued to lose share in this market and currently has ~33 percent share (down from ~72 percent in 2010),” Ferragu wrote in a note.

Rating Reiteration

But, Ferragu maintains his Outperform rating on the stock as he expects Cisco to grow its share in the switching market eventually.

“[C]isco can sustainably defend switching revenues and even grow them in the low-single digits in coming years. The Advanced Datacentre segment is an area of weakness, but isn't shrinking and represents only ~2 percent of Cisco's revenues and less of profits,” Ferragu added.

Shares of Cisco closed Wednesday’s trading at $34.09. The analyst has a price target of $37.