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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 47.38+1.3%3:59 PM EDT

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From: Eric11/13/2020 4:17:26 PM
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Cisco Stock Is Rebounding After Earnings. Why There's Still Work To Do. --

3:40 PM ET 11/13/20

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By Eric J. Savitz

At least for now, Cisco Systems is out of the investment doghouse.

On Thursday, the networking giant posted better-than-expected results for the fiscal first quarter ended Oct. 24 and the company's guidance for the January quarter was a little better than the Street had been anticipating. As Cisco (ticker: CSCO) CEO Chuck Robbins said in an interview with Barron's , the numbers may not have looked great mathematically, but they were "better than we thought."

Cisco posted revenue for the quarter of $11.9 billion, down 9% year over year, which was at the high end of the company's guidance range. Non-GAAP profits of 76 cents a share exceeded the company's target range of 69 to 71 cents. Cisco projects January quarter revenues will be flat to down 2%, with non-GAAP earnings per share of 74 to 76 cents. That's above the old Wall Street analyst consensus, which had called for a 3% decline in revenue, and non-GAAP profits of 73 cents a share.

To be sure, this was no return to the Cisco of old. Revenue from the core infrastructure platforms business was down 16%. Enterprise orders were down 15%, and orders from Asia were off 14%. But there were some positive signs beyond the top and bottom lines. The severe recent order declines from commercial customers -- basically small- and medium-size businesses -- moderated. Demand from cloud customers was strong. Security revenue was up 6% and public sector revenue was robust.

Add it up, and you get a quarter that pleased analysts, though some remain cautious about the sustainability of the rebound.

New Street Research analyst Pierre Ferragu on Friday upped his rating on Cisco shares to Buy from Neutral, setting a Street-high $60 price target. In a research note, Ferragu notes that the company is exposed to legacy and on-premise IT spending, "which has made 2020 a difficult year." But he says the revenue decline has troughed, with January quarter revenues likely flat sequentially and down just 1% at the midpoint of the guidance range year over year.

"This to us is the beginning of a recovery in IT spending," Ferragu writes. "In our conversations with Fortune 500 companies and industry executives, we see reasons to expect a quick recovery in 2021. In 2020, spending was front-loaded and directed toward emergency responses to Covid and work from home, which led to a very weak second half, but 2021 IT budgets are unlikely to get cut, as in-depth transformation projects have only been postponed."

Evercore ISI analyst Amit Daryananai writes that "this one goes out to all the haters ... reduced uncertainty, improving revenue trajectory, and easy compares make Cisco an attractive large-cap asset to own especially for value investors." He keeps his Outperform rating and $54 target.

Barclays analyst Tim Long likewise writes that "both tone and visibility has improved since last quarter, and we believe CSCO has room to run in the post-pandemic recovery." He keeps his Overweight rating and $50 target.

And RBC Capital's Robert Muller writes that "with long-duration secular tailwinds intact, steady market leading positions, and favorable valuation ... we continue to view the long-term CSCO story favorably." He keeps his Outperform rating, and inches up his target to $49, from $48.

Other analysts saw the quarter as a step in the right direction, but want to see more evidence before jumping aboard.

William Blair analyst Jason Ader keeps his Market Perform rating. "We contend that pandemic or no pandemic, Cisco's business is not yet out of the woods, with the long-term structural pressures ... remaining in place," he writes in a research note. "While Cisco has been attempting to pivot its business toward a greater mix of software and recurring revenue, we believe the pandemic has spotlighted the firm's product deficiencies (especially in the cloud), nonstrategic assets (e.g., Cisco's compute portfolio), and competitive challenges (best-of-breed competition chipping away in multiple product areas)."

Ader adds that "without a bolder approach to addressing its strategic shortcomings in a rapidly changing technology landscape, we think that like IBM (pre-Red Hat), Cisco's growth rate will continue to languish and its relevance with CIOs could continue to erode."

Needham's Alex Henderson remains a skeptic, and keeps his Hold rating. "Cisco sounded much more upbeat on the call and all we can do is assume it is in the pipeline activity," he writes. "The numbers reported don't show much cause for optimism. Cisco reported a year-over-year decline in revenues of 9% on a steep decline of 13.1% in product revenues against a decline in the year-ago period....We consider Cisco fairly valued."

Citi's Jim Suva keeps his Neutral rating, though he inches up his target to $45, from $43. "We were impressed with the company's outlook as well as a clear change in tone that went from last quarter's cautious comments of not much improvement to current quarter comments of a more stable and improving demand environment," he writes in a research note Friday. But he adds that he still has some concerns, in particular the 5% drop in overall orders, and the sharp 15% decline in enterprise orders, which deteriorated from down 7% in the July quarter.
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