Cisco's Coming Dose Of Reality

Feb.11.14 | About: Cisco Systems, (CSCO)

Another of our Ndx Dirty Dozen (the 12 biggest Ndx components by market cap), Cisco (NASDAQ:CSCO), reports after the bell on Wednesday the 12th. Cisco has maintained itself as the plumber of the internet age, with nearly all network traffic crossing their equipment at one point or another. They've grown tremendously in the years since the dotcom bubble burst by acquiring technologies that brought them out from the plumbing and onto desktops, into data centers, and now to the Internet of Things.

Cisco has been on a mission to use their acquisition-based innovation model to bring in several companies in the last few months of 2013. Acquisitions have focused primarily on the data center with hardware, software, and security companies bringing customers and technology to Cisco's offerings. Last quarter they acquired Sourcefire, Composite Software, and Whiptail for just over $1B. They've continued their acquisitions, publicly announcing Insieme Networks, and may mention a few more, in their earnings report, to align with the mission they announced at CES; to be a leader of the Internet of Things. Insieme is a San Jose-based company focused on the development of application-centric infrastructure products in the data center.

Taking a few steps back, this acqui-innovation strategy has been at the heart of Cisco's strategy for a long time. They used this strategy for the stagnant collaboration business (including acquisitions of Webex, Jabber, and others) and grew that business to a $4B business. Cisco's data center business is now the one with all the attention and is growing rapidly with 35-45% Q-Q growth inclusive of acquisitions. Despite this pace of growth, Cisco's other business units that have been bolted together, have had difficulty maintaining steady growth when the acquisitions stopped. That is to say bolting all these businesses together isn't creating an entity that is that much greater than the sum of the parts.

With this difficulty accelerating growth without acquisitions, we suspect growth in Data center will be slower this quarter for Cisco, while Switching will be higher, and ultimately services will be driving the revenue growth over products as it has for the last couple of quarters. Estimize and Wall Street are in near consensus on the revenue and earnings per share. With EPS expected to come in at $0.46 and revenue near 11.120b-11.20b (with Estimize seeing room for a little more revenue). Over the last two years, Cisco has beaten the Wall Street estimate every quarter, and either beat or was very close to the Estimize estimate. Yet the price has been fairly stagnant bouncing around $20/share. The consensus price target is down to $23.46 from $26 before the last earnings miss. With EPS coming in at 10-15 cents lower than last quarter, the lower price targets make sense.

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The real question will be whether Cisco touting their data center growth, as a signal of progress, and talking about the Internet of Things, as a signal of future prospects, will satisfy the markets. With stagnant growth, looking deeper at how the crowd has reacted to the past earnings is a prudent exercise.

The shorter-term picture shows the benefit of the doubt the herd may be allowing this week for the company to paint a great picture. This daily bar chart has room for prices to rise toward 24.50, or even 25.80 if all goes well. Thereafter, the weight of the larger degree trends are likely to restrain, if not inflect, prices as the monthly bar chart implies.

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The bigger picture shows the massive resistance the past decade has respected around the 26 zone, offsetting the support surrounding the 12 zone. With roughly 3 points of room before resistance, and 10 points of room before support, this 3:1 risk/reward condition is sub-optimal at best for long exposure at this time.

Our objective decision support engine (NYSE:DSE) highlights the typical follow through of these downwardly pointing stochastics, which most often pull prices lower for another year beyond the current position of this indicator. However, the elephant in this room is the Elliott Wave conclusion that the past 10 years of consolidation are ending, and the '00-'02 crash should resume; at least retesting the lower support boundary, near 12, if not the '02 low near 8. Therefore, we have to be sellers on any strength this week into 26 +/-2, awaiting the next buying opportunity in a year or two, around the 10 +/-2 zone.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.