In its latest research note, BofA/Merrill Lynch maintained a positive outlook on Cisco Systems, Inc. (NASDAQ:CSCO) stock, stating that its long-term thesis on the company is intact despite the presence of some near-term hurdles.
Merrill Lynch analysts said that their analysis of 2Q switching metrics shows that Cisco is still losing market share. Excluding white boxes, Cisco’s share dropped from 67% in 2013 to 65% in 2014 and 62% in the second quarter of 2015 (2QFY15), mostly losing out to Hewlett-Packard Company (NYSE:HPQ), Juniper Networks, Inc. (NYSE:JNPR), and Arista Networks Inc. (NYSE:ANET).
In light of Cisco’s recent initiatives and the associated replacement cycle, such trends outline a bleak picture, which indicates that Cisco’s fundamentals are likely even worse, according to the analysts. They added that these trends suggests headwinds for the stock, as they show the ongoing impact of market standardization and customers looking to open up the network to different suppliers. Although the analysts believe that the stock does not have immediate catalysts, they are still bullish on long-term factors, such as bandwidth growth and the company’s undemanding valuation.
The note further stated: “Starting with the positives, we reiterate our Buy as we believe that downside to the stock is limited, trading at 11x 2016 P/E and 8x ex-cash. In our view, Cisco provides investors with low risk, long-term exposure to the growing bandwidth requirements of carriers and enterprises – all driven by a plethora of new applications and trends.”
Merrill Lynch believes that data traffic will continue to increase exponentially, driven by video content, machine-to-machine wireless connectivity, cloud, Internet of Things (IoT), automotive, and additional applications enabled by 5G deployments. The firm noted that Cisco offers a strong product portfolio that can grow in low single-digits with relatively stable margins. Also, Merrill Lynch analysts see robust momentum for the company outside of switches and routers, into collaboration, wireless, security, and data centers, offsetting declines in Service Provider video.
Furthermore, the sell-side firm disclosed its belief that Cisco’s large switching upgrade will drive some benefit, along with an improvement in carrier spending also providing upside going into calendar year 2015 (CY15). Merrill Lynch analysts pointed out that results so far are less compelling, and they expect continued challenges in switching, slow growth in routing and weak seasonality over the next few quarters.
They anticipate revenue growth to be only 2.3% over the next four quarters with a limited upside to margins. The analysts added: “The new CEO may be able to stir the pot over time, yet any new strategy will likely need time to materialize and bear fruit. As such, we think the stock lacks catalysts near term, and should be viewed as a low valuation/ low risk way to gain exposure to the high level data growth trends.”
Merrill Lynch reiterated a Buy rating and reduced its price objective from $32 to $30 on Cisco shares. Of the sell-side analysts covering the stock, 22 rate it a Buy, 15 recommend a Hold, and six advocate a Sell. The 12-month consensus target price on CSCO is $31.17.
Cisco shares are down 0.43% to $25.43 as of 1:16 PM EDT. The stock has declined 8.5% year-to-date (YTD).
