By Eric J. Savitz
Cisco Systems stock picked up a tentative endorsement from Citi on Friday.
Analyst Atif Malik resumed coverage of the networking hardware provider with a Neutral rating, while opening a “positive catalyst watch” designation to the stock.
Malik notes that Cisco earnings estimates are likely to decline for the next quarter or two as customers work down excess inventory. The company will also be absorbing the impact of its $28 billion acquisition of the observability software company Splunk, which it completed ahead of schedule last month.
On the company’s most recent earnings call in February, Cisco CEO Chuck Robbins said it is taking longer than expected for customers to clear their inventory, and that the process would still take another quarter or two. Cisco is projecting revenue for the July 2024 fiscal year will be down between 8% and 10% from the previous year.
But Malik says the stock’s valuation fully reflects both the Splunk deal’s impact and the continuing customer inventory issue. The stock is trading at just 13 times forward earnings, below its three-year average of about 14 times — and well under the S&P 500 at 19 times, he writes.
“The stock is washed out, in our view,” he writes.
Malik adds that Cisco continues to face market challenges in some areas, and the company’s artificial-intelligence exposure is less than 2% of its revenue mix. But the earlier-than-expected close of the Splunk deal is a positive, he notes. The analyst also sees possible catalysts for the shares in both the company’s coming earnings report on May 15 and an investor day planned for June.
Cisco shares on Friday are down 1% at $49.04, with the Nasdaq Composite off about 1.4%.
Write to Eric J. Savitz at eric.savitz@barrons.com