Analyst: Has Cisco hit a financial wall?
Don Luskin, CEO, MetaMarkets.com
Shares of the tech bellwether fell $4.69, or 13 percent, to $31.06 by market close. Earlier, shares hit a new 52-week low of $29.88. In the first hour of trading Wednesday, more than 54 million Cisco shares exchanged hands. By 1 p.m. PST, the close of regular trading, more than 280 million shares exchanged hands.
Cisco controls more than two-thirds of the global market for routers and switches that link networks and power the Internet. The San Jose, Calif.-based company has also begun to move into the optical-telecommunication market dominated by companies such as Nortel Networks and Lucent.
After the market closed Tuesday, the Internet equipment giant fell short of analysts' estimates for its second quarter with earnings of 18 cents a share on sales of $6.75 billion. The company predicted flat revenue for the third and fourth quarters.
Cisco executives said fiscal 2001 revenue growth is now projected to be in the "40 percent range," down from previous projections of 50 to 60 percent revenue growth.
The fallout from the Cisco miss was felt across the sector. By midmorning, shares of competitor Juniper Networks were off $5.94 to $96.25, a drop of almost 6 percent; JDS Uniphase had fallen $2.41 to $49.41, or more than 4 percent; and Ciena had lost $2.44 to $80.25, sliding 3 percent.
Analysts responded with a wave of downgrades and estimate reductions.
At Morgan Stanley, analyst Christopher Stix was among the most critical of Cisco's earnings. He downgraded the stock to "neutral" from "strong buy," and cut estimates for 2001 and 2002--the third time in the last month.
For Stix, Cisco faces serious short-term issues in the form of decreased earnings visibility, general economic weakness, slow growth in carriers' capital spending, legacy product growth and employee retention problems. The analyst added that he believes the stock is unlikely to post gains for the next three to six months.
The analyst said that much uncertainty remains. "If there is an upturn in the economy and (capital expenditure) growth is reinvigorated, then the company could return to 30 percent annual growth rates. The problem is, we don't know, and they don't know," Stix wrote.
A severe and speedy downturn
Analyst Steve Kamman at CIBC Oppenheimer, who has a "hold" rating on the stock, summed up the consensus view on Wall Street. "We had expected a downturn but admit that it arrived with more severity and speed than expected," Kamman wrote.
The CIBC analyst deserves some credit. He bucked his peers with a negative report on Cisco last month. On the same day as Kamman's report, Cisco CEO John Chambers mentioned at an investment conference that the second quarter would be "more challenging."
Kamman's report, coupled with Chambers comments, resulted in 212 million Cisco shares exchanging hands on Jan. 10.
At UBS Warburg, the company was reiterated at a "buy" rating, but the 12-month price target was slashed to $40 from $60, and 2002 earnings estimates were lowered. Lehman Brothers analyst Tim Luke dropped the company to "buy" from "strong buy," cut the price target to $36 from $45 and reduced estimates for fiscal 2001.
For all the gloom and doom, many analysts held out hope for a silver lining for investors.
Analyst Michael E. Ching at Merrill Lynch offered a positive longer-term view of the stock, while lowering estimates for fiscal 2001 and 2002.
"Despite this disappointing performance, Cisco is still growing faster than most of its peers, and remains an attractive long-term investment, in our view," Ching wrote in a research note. The stock was maintained at a long-term "buy" rating.
Ching said Cisco's weakness derived from lower capital spending at emerging service providers. Cisco itself has added to some of these issues by reducing its commitment to vendor financing, he said.
In a report, Salomon Smith Barney analyst B. Alexander Henderson said investors should buy shares of the networking giant.
"Cisco, as feared, sharply lowers guidance, cutting revenue targets and sharply lowering margin expectations," Henderson said in a research note. "However, we think this puts Cisco within a week of hitting its trough valuation in this cycle and accordingly we are strongly recommending investors buy Cisco on the current weakness."