Not So Fast, Cisco Investors: 'Look Beyond The Near-Term Optics'

In a report issued Thursday, Macquarie analyst Rajesh Ghai looks into Cisco Systems, Inc. CSCO after its recent top and bottom-line beat, and the “warm send-off to its outgoing CEO John Chambers.” Despite the bullishness surrounding the earnings report, the expert looks “beyond near-term optics” and reiterates an Underperform rating and $26.00 price target on the shares.

Related Link: Early Wall Street Reactions To Cisco's Impressive Earnings

According to the note, the firm is not surprised by the strong quarterly results. However, it is not encouraged by the elements that drove the upside (Collaboration and SP Video), which are not likely to persist going forward, either. Also discouraging are the relative softness in Switching, Data Center and Security segments. “With Sourcefire firmly in Cisco’s y/y comps, organic growth is clearly proving more difficult,” the experts add.

Management was quick to highlight the specific market, technology and revenue model transitions taking place in the slower segments. Nonetheless, Macquarie analysts believe these issues support their long-term thesis on the name: Cisco is facing multiple transitions that will probably affect –negatively- its future performance.

Finally, Ghai poits out that the recent devaluation of the RMB will probably provide Huawei with “an additional pricing advantage in emerging markets and the SP vertical.”

Macquarie is now modeling EPS of $2.33 on revenue of $50.4225 billion for fiscal 2016 (up from a previous estimate of $2.21 and $49.65 billion), and EPS of $2.36 on revenue of $51.8965 billion for fiscal 2017 – up from $50.984 billion and $2.34.