Low Expectations Ahead of Cisco Systems (CSCO) Report

Low Expectations Ahead of Cisco Systems (CSCO) Report

November 11, 2020

Cisco Systems, Inc. (CSCO) reports fiscal first quarter 2021 earnings after Thursday's closing bell, with analysts expecting a profit of $0.70 per share on $11.85 billion in revenue. Earnings per share (EPS) will mark a 17% decline compared to the same quarter in 2019 if the Dow component meets consensus. The stock fell more than 11% after the networking giant lowered first quarter top- and bottom-line guidance in August and has relinquished another 9% since that time.

Key Takeaways

  • Cisco Systems warned about first quarter earnings and revenue in August.
  • The stock is trading dangerously close to the March low.
  • Oversold technical readings offer bulls a slight edge heading into Thursday's confessional.

Legacy routing and switching income has been shrinking for years, forcing Cisco to develop new revenue streams through software and services. This strategy has worked to a limited degree with other old-school tech behemoths, but the new divisions have, so far at least, failed to replace lost hardware revenue. Another round of investment, acquisitions, and restructuring may be needed to make up the deficit and get the company back on the growth track.

Wall Street consensus on Cisco stock is mixed and apathetic, with a "Moderate Buy" rating based upon 10 "Buy" and 9 "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $36 to a Street-high $55, while the stock will open Thursday's session about $8 below the median $47 target. There's room for upside in this placement, but the August warning lowers the odds for an upside surprise.

Restructuring is an action taken by a company to significantly modify the financial and operational aspects of the company, usually when the business is facing financial pressures. Restructuring is a type of corporate action taken that involves significantly modifying the debt, operations, or structure of a company as a way of limiting financial harm and improving the business.

Cisco Long-Term Chart (2000 – 2020)

The stock posted an all-time high at $82 in 2000, following a multi-year uptrend that featured eight stock splits. It sold off to the single digits when the internet bubble burst and has traded within those boundaries for the past 19 years. A recovery wave into 2007 stalled below the .382 Fibonacci selloff retracement level, while the selloff into 2019 found support about five points above the prior low. It tested that level successfully in 2011, completing a long-term double bottom reversal.

Price action finally completed a round trip into the 2007 high in 2017, yielding a breakout about seven months later. It mounted the .618 retracement in April 2019 and reversed in August, reestablishing resistance at this harmonic level, which has the power to end an uptrend, dead in its tracks. The stock sold off to a two-year low in the first quarter's pandemic decline, finding support at the .382 retracement level.

Cisco Short-Term Outlook

The subsequent recovery wave failed in June, yielding a downtick that is now testing the first quarter low. Bearish price action has confirmed resistance at the 50-month exponential moving average (EMA) in the low $40s at the same time, potentially limiting upside into year end. Even so, the reaction to this week's earnings report should dictate price action into 2021, with the unfilled gap between $44 and $47 marking a potential magnetic target.

The monthly stochastic oscillator offers bulls a slight edge, dropping to the same oversold level that triggered new buying cycles in 2012, 2013, and 2019. However, this indicator rarely turns on a dime, and Cisco is an exceptionally slow mover, lowering the odds for a one-day trend reversal and sentiment change. A buying spike above the broken 50-month EMA is needed at this point to set off preliminary buying signals, so there's no rush to jump on board.

A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0-100 bounded range of values.

The Bottom Line

Cisco Systems heads into Thursday's earnings release less than seven points above March's two-year low.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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