The shares of Cisco Systems Inc. (Nasdaq: CSCO) declined by 1.47% or $0.69 to close at $46.15 on Thursday after Goldman Sachs analyst Rod Hall downgraded the stock to “neutral” from “buy” rating, on the assumption that nervous enterprises may limit their spending, thereby impacting the networking giant’s earnings potential.
The stock is up 6.1% year-to-date, compared with the S&P 500’s 17.6% appreciation. Notably, the stock has lost more than 20% since recording an intraday high of 58.26 on July 16th.
The analyst believes that enterprise spending will decrease further in the months ahead and in particular, capital expenditures of telecom firms will remain “depressed” in the short-term. In a note to clients, Hall wrote: “In the telecom segment, we are concerned that negative trends could persist well into 2020, driven by carrier pauses ahead of 5G and needed carrier network automation implementation.”
In general, Goldman’s latest research of value-added resellers was “incrementally negative” on spending trends of companies. The research report says that “We believe that most of this weakness relates to a lack of business confidence at large enterprise driven by trade volatility as opposed to a broader macro slowdown.”
Based on the above arguments, the analyst downwardly revised the price target to $48, from $56 issued earlier.
In August, the company issued a weak earnings outlook, which saw the stock declining sharply. Even though some analysts have a bullish view of the company, investors are concerned about the impact of the trade war between the US and China.
The quarterly and full-year results looked good, with Cisco reporting 7% revenue growth for the fiscal year 2019. Non-GAAP earnings grew 20% y-o-y to $3.10. The forward guidance triggered the sell-off at that time.
Cisco’s predicted first-quarter revenue growth of 0% to 2%, GAAP EPS growth of -14% y-o-y, and non-GAAP EPS growth of about 8% y-o-y. Currently, Cisco is trading at about 14.9x trailing twelve-month earnings. That multiple is higher than Cisco’s five- and ten-year average trailing PE ratios of 14.1x and 13x, respectively.
Despite predicting a decline in enterprise spending, Hall expects capital expenditures on 5G wireless networks to increase in the future.
Hall wrote, “In the telecom segment, we are concerned that negative trends could persist well into 2020, driven by carrier pauses ahead of 5G and needed carrier network automation implementation.”
Notably, Cisco is moving away from its main business of selling routers and network switches. The company is also looking for valuable acquisitions to increase its software product offerings, according to James Fish of Piper Jaffray.
Therefore, the downgrade is expected to keep the stock weak temporarily.
Technically, the stock has closed below its 50-day moving average. Additionally, the stochastic oscillator is in the bearish zone. The stock is also facing heavy resistance at 48. On the downside, the next major support is anticipated near 40. Therefore, we expect the stock to move down in the short-term.
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