Oppenheimer Very Negative on Cisco: Who Are the Winners?

While the Internet seems to have boundless growth, one of the tech world’s biggest players continues to struggle. Networking giant Cisco Systems Inc. (NASDAQ: CSCO) has posted three very poor quarters in a row. If the analysts at Oppenheimer are right, the next quarter could easily make it four. While Cisco continues to hold its own in high-end switching, next quarter, emerging markets and its Insieme product cycle are likely to result in a quarter-over-quarter decline of close to 15%. With 2014 set up as a transitional year, the question is how fast and how far can Cisco rebound?

While on a long-term basis the firm remains optimistic on the stock, and it holds its Outperform rating, the near term may provide some rough sledding. Cisco has already felt the pain of slowing growth in China. The Oppenheimer team believes it will have only limited opportunities in China longer term as the Chinese vendors step in. The question is whether Cisco’s rivals are taking share? The Oppenheimer analysts think that could indeed be the case.

Here are some companies in the mix for a share of Cisco’s territory.

Hewlett-Packard Co. (NYSE: HPQ) has had a remarkable comeback under the leadership of Silicon Valley veteran Meg Whitman, and its stock is rated Outperform. Whitman’s most important point for 2014 is her plan to use free cash flows in order to reduce the existing debt, repurchase new shares and maintain the dividend payout policy. All of this is in the best interest of shareholders. The company’s share in 1 gigabit E fixed switching improved 10 basis points, or one-tenth of 1%, year over year as it continues to benefit from its local presence and brand name (H3C) in China, while other U.S. vendors are increasingly challenged in the region. Investors are paid a 1.9% dividend. The Thomson/First Call price target for the stock is $31.78. HP closed Friday at $29.79.

Juniper Networks Inc. (NASDAQ: JNPR) has been doing everything right. Oppenheimer sees good things going forward and has an Outperform rating on the stock. Positive activist shareholder moves combined with a solid product cycle have made the stock a favorite on Wall Street. By vendor, Juniper posted the strongest year-over-year growth at +38.7% in the key switching market. For the near term, Juniper may be the best stock to own. The consensus price target is $28.89. Juniper closed Friday at $27.95.

Brocade Communications Systems Inc. (NASDAQ: BRCD) is also rated Outperform at Oppenheimer and was recently upgraded to overweight at Merrill Lynch. The company also made our list of top technology stocks to buy trading under $10. The analysts at Oppenheimer think the company’s model has established firmer footing, and there is potential for incremental upside to revenue, earnings and free cash flow over the next 12 months. While the company trails its big cap competitors, the stock could prove interesting for investors looking to see a comeback effort by the company. The consensus price target for Brocade is $9.82. The stock closed Friday at $9.53.

Cisco again managed to hold its share position during the fourth quarter of last year at 64.5%, down 1.5% year over year. The current quarter will prove the most challenging in several years. The Oppenheimer analysts expect Cisco’s revenue to fall significantly (potentially up to 15% quarter over quarter), considering last quarter’s results. Investors may want to swap from Cisco to Juniper or HP and wait until Cisco finally bottoms in the summer. Then, the time may be ripe to own the stock again for substantial gains.