Legacy Businesses Weigh On Cisco Systems Outlook

Dow component Cisco Systems Inc. (CSCO) reports fiscal Q1 2021 earnings on Nov. 12, with Wall Street analysts looking for a profit of $0.70 per-share on $11.85 billion in revenue. If met, the earnings-per-share (EPS) would mark a 17% profit decline compared to the same quarter in 2019. The stock sold off more than 5% after warning about the current quarter’s earnings and revenue in August and has relinquished another 16% since that time.

Hardware Revenue In Multiyear Decline

Revenue from legacy routing and switching businesses has been declining for many quarters, forcing the company to reinvent itself through software and services. This approach has worked well for other old school tech giants but income from the new divisions has, so far at least, failed to replace lost hardware revenue. Additional investment, acquisitions, and restructuring may be needed to cover the shortfall and get Cisco back into mid-to-high single digit growth.

Citigroup recently downgraded Cisco to ‘Neutral’, with analyst Jim Suva warning that “Cisco’s switching and routing sales, or about 40% of total sales, remain on the decline and we are less confident in the company’s ability to return to growth or gain market share, particularly in declining markets. As a result, we do not expect Cisco’s hardware segment (Infrastructure Platforms) to return to growth near term.

Wall Street And Technical Outlook

Wall Street consensus is split right down the middle, with a ‘Moderate Buy’ rating based upon 10 ‘Buy’ and 10 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $36 to a Street-high $55 while the stock is set to open Tuesday’s U.S. session right at the low target. There’s plenty of room for upside in this humble configuration but the company isn’t likely to exceed modest expectations later this week.

Cisco topped out about 24 points below 2000’s all-time high at 82.00 in April 2019 and broke down in August, entering a decline that immediately sliced through support at the 200-day moving average. The stock fell to a two-year low during the first quarter’s pandemic decline and failed a second attempt to remount moving average support in August. It’s now trading just four points above the March low, raising odds it will test and possibly break that level in coming months.

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