Cisco Systems’ stock (CSCO) experienced a slight dip on Wednesday amidst a thriving stock market after an analyst from BofA Global Research, Tal Liani, downgraded the networking-infrastructure company’s rating to Neutral from Buy. Despite maintaining his target price of $56, Liani’s decision caused Cisco’s stock to decline by 0.8% to $51.69. In contrast, the Nasdaq Composite witnessed a surge of over 1%.
Cisco shares have significantly underperformed the market this year, only achieving a gain of 9%, which pales in comparison to the Nasdaq’s impressive 38% rally. Liani provides reasoning for his revised rating, explaining that the street’s estimations for Cisco’s product-revenue growth appear overly optimistic for both fiscal years 2024 and 2025. According to his analysis, this fiscal year’s expected product revenue growth of 13%, following a 6% growth in fiscal 2022, has been bolstered in an unsustainable manner by the drawdown on the historically high backlog. This backlog accumulated during the component shortages witnessed throughout the pandemic. It is worth noting that product revenue accounted for approximately 75% of Cisco’s overall revenue during the first nine months of fiscal 2023.
Liani brings attention to the fact that consensus estimates project 3% year-over-year product growth for fiscal 2024 and 2% growth for fiscal 2025. However, he argues that these predictions imply product revenue levels “much higher than historical levels.” To support his claim, the analyst highlights Cisco’s annual product revenue from fiscal 2012 until now, which ranged from $36 billion to $39 billion. Furthermore, approximately 80% of this revenue is generated from switches, routers, Wi-Fi, and wireless networking hardware. Liani anticipates that fiscal 2023 product revenue will reach $43 billion due to a $5 billion to $6 billion backlog drawdown. If excluding the boost from the backlog, product revenue would amount to $37 billion.
Cisco: Potential Risk of Disappointment in Forecasts
By Eric J. Savitz
Cisco’s current street estimates for product revenue in fiscal years 2024 and 2025 stand at $44.2 billion and $45.3 billion respectively. These estimates do not account for any further backlog support. However, Liani, an industry expert, warns that the backlog is expected to normalize by the second half of the next fiscal year. Liani believes that the forecasts are based on the assumption of a sharp order recovery, which poses a significant risk of disappointment.
Cisco is set to announce its financial results for the fiscal fourth quarter and the year in mid-August.
The stock of Cisco took a hit after its fiscal third-quarter earnings report in May. The decline can primarily be attributed to a significant decrease in orders, with a 23% drop following a 22% decline in the second quarter.
In a recent interview with Cisco’s Chief Financial Officer Scott Herren, he explains three factors contributing to the order decline. Firstly, lead times have decreased significantly as component availability improved. Over the past two quarters, lead times have decreased by approximately 40%. Consequently, customers are now less aggressive with placing orders.
Secondly, Cisco’s improved ability to ship products has resulted in some customers entering a digestion period to process their completed orders. Additionally, both service providers and other large customers are experiencing an elongated sales cycle.
Given these circumstances, Herren stresses the importance of being prudent during this time.