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Cisco's Long-Term Outlook Worries Investors

Stocks in this article: CSCO

Cisco share story updated with additional analyst comment.

SAN JOSE, Calif. ( TheStreet) -- Cisco's (CSCO) first-quarter results, released after market close on Wednesday, sent tech stocks plunging and have raised questions about the company's long-term growth potential.

The networking giant beat Wall Street's first-quarter earnings estimate, and edged analysts' revenue forecast, but weak guidance hammered the company's shares in after-hours trading.

Cisco
Cisco CEO John Chambers

Cisco's stock plummeted more than 13% shortly after its results came out, hitting $21.15, and fell even further to $20.50 at market open. The plunge was the company's worst post-earnings drop since 1994, according to Birinyi Associates, and left some analysts questioning the firm's long-term strategy.

"Our view remains that Cisco's growth drivers at this point in its life cycle are more cyclical than secular, and with the cyclical refresh in networking now largely behind us it is difficult for the company to grow," noted Simona Jankowski, an analyst at Goldman Sachs, in a note released on Thursday.

Jankowski, who lowered her 12-month Cisco price target from $25 to $23, believes that the push towards cloud computing also presents a big challenge to the networking firm. "CIOs' preference for best-of-breed vendors in the move to cloud is putting competitive pressure on integrated IT vendors such as Cisco," she explained, adding that this could be highly disruptive for Cisco's core switching business.

In addition to the tepid guidance, comments from Cisco CEO John Chambers clearly spooked investors, particularly given the company's status as a tech bellwether. For the second straight quarter, the networking giant gave a cautious economic outlook as Cisco noted that first-quarter orders were $500 million below forecast.

Despite plenty of analyst love prior to earnings, Cisco felt the impact of public sector weakness, both in the U.S. and overseas. Speaking during a conference call after market close, Chambers cited a "dramatic" slowdown in U.S. state government spending, as well as softness in parts of Europe and Japan.

"We hit some air pockets this quarter," explained the Cisco chief. "We think that some of the challenges in public sector spending will be with us for a couple of quarters."

Service providers were also problematic, with U.S. orders declining 2% during the quarter. Cisco's North American cable business, in particular, is feeling the effects of tight consumer spending and the slowdown in home building, according to Chambers.

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