Cisco Systems, Inc. (CSCO) Clearly Losing Share, But Points to Positive DRAM Impact for Micron Technology, Inc. (MU)

One networking equipment maker’s revenue guide detriment sometimes can translate to enticing upside prospects for a chip giant- or so seems to be the case in the upshot of fiscal quarterly earnings handed in yesterday from Cisco Systems, Inc. (NASDAQ:CSCO)  and Micron Technology, Inc.’s (NASDAQ:MU) advantageous payoff near-term.

Cisco shares are on a 4% dip in trading today after delivering a fiscal fourth quarter print that failed to excite the Street with a fiscal first quarter guide for 2018 that had an Achilles’ heel of gross and operating margin expectations.

Top analyst Tim Long at BMO chimes in from the sidelines, noting that though most of the print indicated glimmers of encouragement, Cisco has not done enough to sway him from the sidelines considering deficient short-term drivers to match the competition.

Therefore, the analyst reiterates a Market Perform rating on shares of CSCO with a $32 price target.

For the fiscal fourth quarter, the networking equipment maker brought in $12.13 billion in revenue, just ahead of the analyst’s and consensus forecasts, with “in line” EPS of $0.61, “in line” gross margins of 63.7%, and op margins of 31.5% that “solidly” outclassed the analyst’s 30.3% projection on back of lower operating expenses. While on a segment basis, Cisco’s switching and routing underperformed consensus, the performance did come in a bit on top of the analyst’s estimates, with wireless, data center, SP video, and others faring “better.” However, security and collaboration ultimately “fell short,” with order trends coming up “mixed.”

For the first quarter of fiscal 2018, it appears the revenue outlook did less than impress investors, with the CSCO management team looking for a 1% to 3% year-over-year dip that while came in as expected, gross and operating margin guidance underwhelmed. The analyst attributes the challenges in outlook to a reflection of rising component costs that should linger nipping at Cisco’s heels for “at least” the upcoming few quarters.

Long notes, “Cisco was encouraged by early feedback and traction for its new Catalyst 9000 switch, with the majority of customers opting for the most advanced subscription offering. Beyond that, switching was weak in the quarter, with a 10%+ Y/ Y decline in campus switching and flat revenues in the data center, though ACI grew 38% Y/Y. Cisco is clearly losing share and its performance significantly lags the recent growth of Arista at 50% Y/Y and Juniper at 32% Y/Y this quarter.”

On the whole, “Cisco reported a decent quarter and outlook as the transformation of its business to a recurring revenue model is encouraging, but it remains too early to get excited,” Long concludes, underscoring the network equipment maker’s shortcomings compared to the rest of its peers: “Cisco continues to lag its competitors in switching, and security revenue weakness highlights the lag between strong subscription growth and revenue timing. While the stock is relatively inexpensive, we do not see any meaningful near-term catalysts.”

Tim Long has a very good TipRanks score with a 66% success rate and a high ranking of #140 out of 4,627 analysts. Long garners 16.9% in his yearly returns. When recommending CSCO, Long gains 17.8% in average profits on the stock.

Conversely, Micron shares were rising 3% yesterday, as Cisco’s skittish investor sentiment does not bode the same for this chip giant.

Top analyst Vijay Rakesh at Mizuho is out with bullish confidence, noting “Cisco points to stronger DRAM impact for the next couple quarters,” adding that this is a big “positive for MU.”

In reaction to Cisco’s earnings call, the analyst sees an improvement on topline and gross margin profits for the chip giant, subsequently reiterating a Buy rating on MU with a price target of $38, which implies a just under 24% increase from where the shares last closed.

Rakesh highlights, “CSCO GM negatively impacted ~100bps (‘half of 2-point GM decline’) by DRAM pricing, and expected to continue near-term. CSCO on its earnings call last night noted its product GM was down 200bps, negatively by impacted by memory pricing. CSCO has built about ~$400M of memory inventory but still sees tight supply and higher pricing and expects continued memory impact on GM ‘for the next couple of quarters coming up here for sure’. Upside pricing trends could drive better topline and GMs at MU.”

The future looks bright for the chip giant’s investors, as Rakesh surmises, “We continue to see upside in MU into 2H17 with strong fundamental trends and attractive valuation (trading at ~4.6x F18E EPS) as the cheapest memory OEM globally.”

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, top five-star analyst Vijay Rakesh has achieved a high ranking of #35 out of 4,627 analysts. Rakesh maintains a 71% success rate and realizes 27.1% in his annual returns. When suggesting MU, Rakesh yields 44.2% in average profits on the stock.

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