Chuck Robbins took the helm at Cisco Systems, Inc. (CSCO) back in August, but the honeymoon period is over.
Cisco earnings for its fiscal first quarter were solid, but guidance was not, and as a result Cisco stock was off about 5% in early Friday trading.
The question for new money is — what’s going on, and is this a buying opportunity for CSCO?
The basic stats: Revenues increased 3.6% year-over-year to $12.7 billion, while earnings were up 9.3% to 59 cents per share. Both figures beat Street estimates of $12.65 billion and 56 cents per share, respectively.
But again, it was the guidance that was the main culprit for the drop in Cisco stock. The company now believes that the next quarter will see anemic growth of 0% to 2% and earnings of 53 cents to 55 cents. Yet the analysts’ consensus was for a more robust 5% growth rate and for Cisco earnings of 56 cents per share.
As should be no surprise, the company is getting weighed down by the overall volatility in the U.S. dollar, which has been a problem for most multinational tech operators, including IBM (IBM) and Qualcomm (QCOM).
But there also appears to be serious problems in the Asian markets. The major changes in China’s currency are causing shockwaves across the region, and many companies are holding off on tech investments as a result.
And other factors may be at work that could have a longer-term impact on Cisco stock.
For example, there are a variety of low-cost operators in China, like Huawei, that pose serious competitive threats. At the same time, CSCO is facing intense competition from fast-growing startups in U.S., such as Arista Networks (ANET), which are using next-generation software technologies.
Something else: CSCO must actually deal with the Internet powerhouses like Facebook (FB), Alphabet (GOOG, GOOGL) and Amazon (AMZN). While previously just masters of their own disparate parts of the world, these companies have been developing their own sophisticated networking technologies to handle the fire hose of data. No doubt, this means a loss of opportunity for CSCO. But there’s also the danger that they sell out these technologies, much like AMZN did with Amazon Web Services, which has turned into a massively successful business.
It’s true that CSCO has other interesting lines of business, such as security. But even this segment is trailing off, with growth of only 7% in the latest quarter. Interestingly enough, as seen with the recent poor performance of companies like FireEye (FEYE), the security business may also be feeling some headwinds.
So even though Cisco stock is cheaper now — with a reasonable forward price-to-earnings ratio of 11 — investors probably should hold off for now. CSCO must deal with tough competitive forces and weak macroeconomic trends.
More importantly, there could be longer-term issues, such as with the impact from the Internet powerhouses that have tremendous resources to build and spread their own technologies.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
