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The Institutional Tide Has Turned For Cisco Systems 

The Institutional Tide Has Turned For Cisco Systems 

This Is Not The Bottom For Cisco Systems 

After 10 quarters of net buying, the institutional tide driving Cisco Systems' (NASDAQ: CSCO) price action has turned. The institutions have been, so far in Q2, net-sellers and responsible in large part for the recent decline in share prices. If this trend continues, with about 75% of the stock on the line, the institutions could drive this stock much, much lower before it hits bottom. The Q3 results were not great and reflect a growing issue in the broader economy that we think is going to weigh on share prices for the foreseeable future. The only good news we can think of is the stock will be a deep value and high yielder among tech when it does. 

Cisco Systems Whiffs Due To Geopolitical Issues 

Cisco Systems had a decent quarter but one plagued by geopolitical issues that are out of its control. The company reported $12.48 billion in revenue for a gain of 0.3% over last year but missed the consensus mark by $0.500. The mitigating factor is that revenue was not hurt by demand, the company CEO says demand has not changed, but the impact of Russia and lock-downs in China cut crimped results. The company estimates those impacts cost it $0.500 billion in top-line results which isn’t exactly good news. If the company had not been affected by those things revenue would only have been as expected which isn’t a catalyst for higher share prices. 

Turning to the earnings, there is some good news worth hearing but it is not enough to hold up the price action. The company was able to widen margins on a YOY basis and drive a solid bottom-line result. Both the GAAP and adjusted earnings are up versus last year and outpacing revenue growth with adjusted EPS of $0.87 a penny better than expected. The bad news is that growth has peaked and the guidance is unfavorable. The company is expecting Q4 revenue to fall 1% to 5.5% versus last year and for EPS to come in well below the consensus. 

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The Analysts Aren’t Buying It 

The general consensus among the analysts is that Cisco’s slowing growth is a concern. At least 14 of the 24 analysts rating the stock have come out so far with commentary and most of it is bearish. Fully 13 of the 14 lowered their price target while the one outlier upgraded the stock to Buy from Hold. The consensus of the newest targets is $50.60 and a full $5 or 10% below the broader consensus. The broad consensus on the stock is a firm Hold down from firm Buy one year ago. 

"We still believe that backlog, growing IT intensity, price changes and [operating expense] discipline will ultimately protect earnings power more than investors fear," Meta Marshall of Morgan Stanley said. "But, we are cautious that there is another downtick to come in tone and order growth."

The Technical Outlook: Cisco Systems Sell-Off Accelerates 

The selloff in Cisco Systems is accelerating on the earnings news and outlook and may fall further. The price action fell right through a target for strong support at the $43.65 level and looks like it may fall all the way down to $36.72 or lower. That would be consistent with the pandemic low set in 2020 which is our target for the absolute bottom (assuming there is not a rebound from a higher price point). If price action falls below that level we think this stock could move back into the twenties or high-teens in price.

The Institutional Tide Has Turned For Cisco Systems 

Companies in This Article:

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Cisco Systems (CSCO)$42.60-0.1%3.57%14.95Hold$55.05
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