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Financial Analysts Split on Cisco's Outlook

Dan Jones
4/8/2014
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Some financial analysts are split on Cisco's future prospects in a more software-defined and virtualized networking world.

Raymond James Financial Inc. (NYSE: RJF) continues to hold Cisco at an "Outperform" rating, setting the share target price at $26.00. "We believe Cisco's position is better than appreciated," writes analyst Simon Leopold in a report.

"We think investors struggle to determine its ability to restore growth," Leopold writes. "We perceive material Fear, Uncertainty and Doubt (FUD) that has weighed on its largest reporting segment, Switching, and suspect confusion and concern have restrained the stock."

He argues that an improving US economy is typically a good indicator for Cisco Systems Inc. (Nasdaq: CSCO) "Improving employment and economic growth bode positively for Cisco's growth," Leopold states.

He also sees Cisco's product refresh, with products such as the Nexus 9000 data center switching series as positive, arguing that customers won't be using "white box" systems for crucial infrastructure like data centers. "We believe that most enterprises either lack the sophistication and resources to implement a white box strategy, or they view their datacenters as mission critical and complex and want to reduce the risk when implementing the 'white box' architecture," Leopold notes.

Centrist view
George Notter at Jefferies & Company Inc. also believes that many Wall Street views of Cisco "are a bit too pessimistic right now."

In a research note sent to clients, Notter notes that SDN is a way off, and it's early days for white box and Linux-based OS strategies. In addition, he believes Cisco's ACI plan, including the OpFlex alternative to OpenFlow, stacks up well against the SDN strategies of VMware and others. (See Goin' South: Cisco Offers 'OpFlex' as Alternative to OpenFlow and Cisco's ACI Gets Physical With SDN.)

"As the incumbent vendor in the Ethernet switching space, Cisco enjoys the benefit of doubt from their customers. Moreover, we think their ACI strategy will be enough to keep customers in the fold," he adds.

Notter has a hold rating on Cisco's stock, with a price target of $22.00.

The downer
A different analyst, however, sees SDN and NFV as a potential competitive threat for Cisco in the future and has revised its outlook accordingly. (See Goin' South: Cisco Offers 'OpFlex' as Alternative to OpenFlow and Cisco CEO: It's Early Days for Virtualization.)

Wunderlich Securities Inc. has downgraded Cisco on concerns about its future in SDN and NFV. The firm has cut its outlook from "Buy" to "Hold" and lowered the share price target from $25.00 to $24.00.

"We came away from industry interviews in recent weeks with the view that the market has less interest in the Cisco product suite than in past transitions," writes analyst Matthew S. Robison in a report quoted by Benzinga. "We see the range of alternatives for network automation/software defined networking (SDN), network function virtualization (NFV), and cloud services as dilutive to the Cisco installed base upgrade opportunity."

Cisco's stock is currently at $22.85, the same price at which it closed Monday.

— Dan Jones, Mobile Editor, Light Reading

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gconnery
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gconnery,
User Rank: Light Sabre
4/8/2014 | 11:33:02 PM
Fighting anti-US equipment sentiment due to NSA surveillance too
I don't see the upside.  The stock is volatile yet has been trading between 20 and 33 for 13 years now.  Sounds familiar right?  That's why Balmer is out at Microsoft now.  I wouldn't put money into the stock unless there was somebody new at the helm.  I don't see it.
sam masud
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sam masud,
User Rank: Light Sabre
4/8/2014 | 1:25:59 PM
Mostly uphill for Cisco
While the SDN ecosystem is a ways from maturing, I don't see how disaggregation of the network (separation of control/forwarding) taken together with bare metal switches plays to the way how Cisco has come to dominate the infrastructure. Can Cisco change its approach and still be successful? That's something it will find very hard to do.
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