Cisco (CSCO) is set to report second quarter fiscal 2019 earnings results after the closing bell Wednesday. And unlike previous quarter, analyst are encouraged by the company’s improvements and are advising investors to buy the stock.
Cisco shares have been rangebound, bouncing between $44 and $47 for quite some time as investors reconcile the degree to which the company, which continues to operate in a mature routing/switching market, can grow revenue. Meanwhile, there’s the lingering trade war between the U.S. and China that remains a headwind for the Cisco’s growth prospects in one of its most important markets.
To mitigate these concerns, the company has been scaling back its switching and routing businesses, while trying to develop growth businesses within service areas such as security, the cloud, data centers, and analytics. On Wednesday, management will be asked to provide key forecasting that suggests meaningful progress in these areas have been made. Analysts such as Instinet’s Jeffrey Kvaal aren’t holding their breath for strong numbers in terms of revenue growth.
Last week Kvaal, who in December downgraded the stock to Neutral, believes there’s little upside to Cisco share, noting that “2019 data points have further sapped our confidence in sustained strength in both IT and service provider spending.” Even with this pessimistic view, Kvaal has a $55 price target on the stock, which suggest potential premium of about 17%. Can we really call him bearish?
In other words, Cisco needs to report a top- and bottom-line beat Wednesday, while also suggesting optimism in the guidance it provides that enterprise spending in 2019 won’t be as bad as Kvaal anticipates. If it can do that, Cisco shares will garner multiple expansion and trade on the assumption that it can grow beyond its legacy routing and switching franchises.
In the three months that ended December, Wall Street expects Cisco to earn 72 cents per share on revenue of $12.41 billion. This compares to the year-ago quarter when earnings came to 63 cents per share on revenue of $11.89 billion. For the full year, ending July, earnings are projected to rise 15.5% year over year to $3.04 per share, while full-year revenue of $51.60 billion would rise 4.6% year over year.
In its last reported quarter, Cisco reported an 8% jump revenues, reaching $13.1 billion and topping Street forecast. Notably, the company’s largest business segment, Infrastructure Platforms, which includes hardware like data center networking switches, reached revenue of $7.64 billion — topping Street forecast of $7.4 billion.
The Applications business, which includes AppDynamics and business collaboration tools, posted revenue of $1.42 billion — higher than the $1.35 billion analysts expected. The company’s Security segment also topped expectations, posting revenue of $651 million in revenue, compared to the $648 million the Street was looking for. On Wednesday investors will want to see whether these positive trends can continue.
All told, as Cisco continues to scale back its cash cow networking business, the management has found ways to offset the decline. And as the company continues to create value synergies from acquisitions such as Broadsoft, Cisco stock should continue to pay off.