Cisco Systems Inc. (NASDAQ: CSCO) shares dipped on Friday after the networking firm saw a big downgrade as 2019 quickly approaches. Overall, the downgrading firm sees some of the tailwinds bolstering this stock fading in 2019, which could pose some problems going forward.
Nomura Instinet cut Cisco to a Neutral rating from Buy, but maintained its price target of $50, which implies upside of 5% from the most recent closing price of $47.47.
On one hand, strengthening information technology spending, a muscular, innovation-led refresh cycle and a rising software mix have lifted Cisco’s multiple and its shares to post-recession highs. But the firm believes some tailwinds, notably IT spending strength, may reverse in 2019 to reveal imperfections in Cisco’s story.
According to Nomura Instinet:
Three drivers lifted Cisco to post-recession highs. Through 2018, IT spending growth accelerated materially, Cisco’s new Catalyst 9000 series more than tripled its customer count, and Cisco’s software mix hit 25% of sales. These drivers helped Cisco exceed consensus estimates through 2018, which led to post-recession highs in Cisco’s multiple and share price.
One of these – IT spending – now steady at best. We expect the product refresh (now with the 9200 and 9800) and rising software mix to remain tailwinds. However, spending may be wobbling; comments from Dell, HPE, and Broadcom suggest incremental caution in CIO thinking. Cisco’s ongoing product refresh leaves it insulated, though not immune, from a slowdown.
The firm considers 12% emerging markets growth (about 10% of sales) above the trend. Unified Computing Systems servers (5% of sales) have benefited from passing through rising memory costs as well.
Cisco’s Webscale remains a strategic hole. Nomura Instinet believes that Cisco has not yet built on initial wins at Microsoft and Alibaba, with webscale making up less than 10% of sales. Weaker IT spending may reveal Cisco’s underexposure to what should be a 15% to 20% growth market in 2019.
Shares of Cisco were last seen down 2% at $46.42 on Friday, with a consensus analyst price target of $52.46 and a 52-week trading range of $37.35 to $49.47.