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Can CSCO Survive Earnings? 3 Pros, 3 Cons

John Chambers could keep the ship steady, but remember: Retirement age isn't far on the horizon

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Cons of CSCO Stock

Resignation of Internet of Things Guru: CSCO took it on the chin last week with the resignation of IoT guru and 10-year Cisco veteran Guido Jouret. Cisco Senior VP Rob Soderbury, who most recently headed CSCO’s enterprise networking business, has stepped in to manage the group. No details were provided on Jouret’s exit except to say that he was leaving the company to “pursue other opportunities.” The exit of the Cisco’s IoT top gun could hardly have come at a worse time — CSCO has invested a quarter of a billion dollars in IoT companies so far, and strong, consistent leadership is critical to success in this burgeoning market. Expect Chambers to field questions about Jouret’s exit on the Cisco earnings call.

Declining Revenue, Earnings: Cisco earnings and revenue might beat the Street’s low expectations, but the results will almost certainly be lower than the same quarter last year. Blame the top- and bottom-line slips on two key factors: a slump in its core router and switch revenue, as well as lower sales in emerging markets like China, Russia and Brazil, which posted double-digit declines in the prior quarter after the NSA spying scandal came to light. While Cisco is working to turn those dynamics around quickly, expect these headwinds to persist to some degree throughout 2014.

Tough Competition: CSCO’s strength has always been in its high-test hardware — data center-switches and routers — and is facing significant challenges from reduced spending by service providers and a trend away from expensive hardware and toward less expensive alternatives like SDN. The SDN trend focuses on putting sophisticated software and applications on bare-bones hardware. As a result, CSCO increasingly is in a price war with competitors ALU and JNPR. Commodity pricing on network gear could rapidly erode CSCO’s margins at a time when it’s attempting to protect its dominant market position through IoT investments and using Nexus 9000 switches to counter the SDN threat.

Bottom Line

John Chambers has done an amazing job of refocusing Cisco as a leaner, meaner competitor, but the hardware-centric market it has dominated is now changing radically. And that’s hard for any market leader that must reinvent itself quickly to hold on to its markets.

CSCO stock by no means is down for the count, but for the balance of 2014, the headwinds outweigh the tailwinds. There are three signs investors should keep an eye on:

  1. Whether Cisco’s emerging market sales can bounce back from the NSA scandal
  2. How quickly CSCO can fill the IoT leadership vacuum created by Jouret’s departure
  3. Whether Cisco can aggressively sell the Nexus 9000 Series – and by extension, its alternate vision for SDN.

Remember too, Chambers turns 65 in August, and retirement is looming on the horizon.

While a fire sale on CSCO stock is certainly premature, I think there will be a near-term pullback in the next couple of months.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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