Cisco has been exposed by COVID-19, this investor says

Tech giant Cisco Systems (Cisco Systems Stock Quote, Chart, News NASDAQ:CSCO) just delivered a better than expected quarter but the shares headed south. What gives?

Scotia Wealth portfolio manager Greg Newman says it’s all about Cisco becoming another slow-growth, legacy name like IBM.

Cisco reported its fiscal fourth quarter and year end results last week, showing revenue down nine per cent year-over-year to $12.2 billion and adjusted EPS of $0.80 per share, down four per cent. And while both numbers beat analysts’ estimates at $12.08 billion and $0.74 per share, respectively, it was management’s guidance for the upcoming fiscal 2021 that caused all the trouble. Cisco called for a further revenue drop of between seven and nine per cent for the upcoming quarter. (All figures in US dollars.)

“As you would expect, the pandemic has had the most impact on our enterprise and commercial orders, driven by an overall slowdown in spending. We are seeing customers continue to delay their purchasing decisions in certain areas while increasing spend in others until they have greater visibility and clarity on the timing and shape of the global economic recovery,” said CEO Chuck Robbins in the quarterly conference call.

Cisco is trying to move its business away from hardware sales to more software and services and cloud-based revenue sources, and while the strategy is laudable, the company still has a long way to go, said Newman, senior wealth advisor for Scotia Wealth.

“COVID is really hurting them, unlike other tech names,” said Newman, speaking to BNN Bloomberg on Monday. “They're a legacy tech name and their business is really focused on expensive on-premises, on-site hardware and switches and gear. And customers over the last few years have really been migrating to the cloud, which has really been eating their lunch.”

“They're trying to pivot to the cloud but a lot of pundits are arguing that they're doing that
a little bit too late,” Newman said.

Cisco has done fairly well to climb out of the market pullback of earlier this year, but the stock is still down 12 per cent year-to-date, a significant downer compared to the positive gains made by other US tech names over the last few months.

Newman says that while Cisco tries to reorient its business, investors have a lot better options to choose from in the tech landscape.

“The valuation of Cisco for today's market for tech stocks is quite enticing: 14x 2022 with a nice 3.4 per cent dividend, so I get where people are attracted to it,” Newman said. “But the question is can they make their growth rate and the market seems to be implying that they're only going to grow their earnings by about six per cent over our forecast horizon. So, the risk reward isn't good enough.”

“It's probably a name that you can buy at some point but I worry about a name like this becoming maybe an IBM, and it could be a lot of years before they really turn the ship,” Newman said.