Cisco (NASDAQ:CSCO) is a stock that has gone nowhere for years and years and for good reason. It was a bubble stock years ago and it has taken over a decade for the fundamentals to catch up to the stock's valuation. Today one can probably say that Cisco's stock is fairly valued, however now that it is -- and has a mainstream valuation -- it is also scrutinized as other mainstream companies. In other words, it no more has the protection of being a "concept stock" it once had.
If there is one thing to notice about the market and the way it trades the past several years, is that the market pays very close attention to revenue growth. It does not really matter if a company is making money or not. As long as there is revenue growth, companies today can be valued at "pie in the sky valuations" for some reason. I don't have an explanation, just calling it as I see it.
So when Cisco guided that its revenues will be lower by 8-10% next quarter, that spooked the market because "revenue growth" is the name of the game in this market, even if non-GAAP EPS was better than expected.
On the company's conference call, John Chambers said that revenue in Cisco's five top emerging markets fell by 12% for Q1. However he also said that this revenue decline accelerated towards the end of the quarter, reaching 25% in Brazil, 18% in Mexico, India and China, and a whopping 30% revenue reduction in Russia.
It is this decline towards end of the quarter why Cisco guided that next quarter's revenues will be lower by 8%-10%.
However, this 12% lower emerging markets revenue for the current quarter, comes on the back of 3% lower revenue in Asia and 6% lower revenue in China during the previous quarter.
In other words, this revenue decline in Asia and China is not something that happened all of a sudden, but is the continuation of a trend, that will probably escalate over the next several quarters.
First of all, this revenue shortfall in the next quarter means that Cisco will probably have lower revenues for the whole year (y-o-y) and the same is probably true for EPS, even in the company has not given guidance for the whole year.
That alone is a sell signal, in a market that thrives on revenue growth. And indeed, as soon as the results were published, Cisco got downgraded across the board by just about every analyst covering the company.
UBS lowered its target price to $26.5, Raymond James to $27 (previous $30), MKM Partners $20 (previous $26), Cantor Fitzgerald $26 (previous $29.5), Nomura $24.5 (previous $27.5) and Goldman Sachs took it off its "Conviction Buy List" and lowered its target to $25 from a previous target of $30 a share.
So from an investment perspective, holding onto to Cisco for the remainder of the year is probably dead money, unless something changes in the near future.
Are lower EM revenues exclusive to Cisco?
While we have not yet received much feedback about EM revenues from Alcatel-Lucent (NYSE:ALU) and Nokia (NYSE:NOK), Juniper Networks (NYSE:JNPR) on Thursday said that it has not been affected and sees no "Snowden effect".
However, while Juniper Networks might not be affected (so far), this is probably an EM phenomena and more specificity a Chinese phenomena, than a problem with the sector or something specific to Cisco.
Our performance in growth markets was driven about half by execution and half by a pause as China moves through the process to develop its new economic plans. China was down 22%. We experienced a slowdown in demand across the board, but most significantly in hardware, which was down about 40%, and which makes up about 40% of our business in China. While we had some execution problems during the third quarter, we were impacted by the process surrounding China's development of a broad-based economic reform plan which will be available mid-November. In the meantime, demand from state-owned enterprises and public sector has slowed significantly as decision making and procurement cycles lengthened. We believe the changes will take time to implement and do not expect demand in China to pick up until after the first quarter of next year.
While Cisco executives cited economic weakness in Europe and emerging economies, and cautious corporate spending overall, the truth of the matter is that besides these issues, Cisco and many other tech giants might be up against a brick wall that they might not be able to break down in the future.
As reported by Reuters, China seems to be embarking on a buy "Chinese campaign", and is urging Chinese companies to buy gear from Huawei and ZTE and avoid foreign firms. And if this Chinese xenophobia persists into the future, then we might be talking about a permanent loss of overseas market share for many U.S. And European tech companies.
For anyone following my writings, I have always said that while the majority of big tech stocks trade at down to earth valuations, nevertheless you will not make much money buying them, unless of course you are simply interest in the dividend. So far this has been the case.
On top of that, today it is clear that many big tech companies like Cisco and IBM, also face some sort of a Chinese embargo, that probably has more to do with Chinese economic weakness at home than with the NSA incident. That might also mean zero or even negative revenue growth for many companies.
And since revenue growth plays a much bigger role in this market than in previous years, that might also mean that the entire big tech sector will probably underperform for the immediate future.