Cisco Systems, a prominent networking-equipment giant, is experiencing a slight decline in its stock amidst a positive day for tech stocks. Raymond James analyst Simon Leopold has expressed caution about the company due to concerns regarding slowing demand.
Leopold has downgraded Cisco’s stock rating from Outperform to Market Perform and has withdrawn his previous target price of $65. Currently, Cisco’s stock is trading at $51.31, down by 0.5%.
One of Leopold’s primary concerns is the declining sales for campus networks. He predicts that demand in this category will decrease by mid-to-high single digits in the upcoming quarter. Leopold highlights that competitors Hewlett Packard Enterprise (HPE) and Juniper Networks (JNPR) are both anticipating market-share gains in this sector.
In addition, Leopold emphasizes that Cisco’s recent $28 billion acquisition of Splunk (SPLK), although strategically sound, limits the company’s flexibility during a time when competitive pressures are intensifying in the security-software industry.
Leopold explains, “Although the acquisition makes strategic sense, the employment of $28 billion caps Cisco’s ability to make other deals, raise its dividend, or acquire other companies.”
Conducting channel checks, the analyst finds that Cisco is expected to have a robust October. However, he sees potential risks in the future.
Recently, attention has been drawn to Cisco’s declining backlog, which the company has utilized to drive substantial revenue growth, as well as decreasing year-over-year orders.
Leopold anticipates that Cisco may forecast a sales decline worse than seasonal norms in its January quarter. This projection considers the period in which customers absorb previous purchases and the persistently weak macroeconomic conditions. Leopold also notes that while “hyperscale operators” (cloud-computing companies) remain a bright spot, they only contribute approximately 6% to the overall sales.
During Cisco’s fiscal fourth quarter, which ended in July, the company stated that its backlog was twice the normal level. However, Cisco expects the backlog to return to normal levels in the new fiscal year, with most of it being worked down in the October quarter.
Sources: Cisco Systems Slips as Analyst Turns Cautious on Slowing Demand
