Greenberg: Why Investors Should be Careful With Cisco
As I wrote in Reality Check this morning, the company remains yellow-flagged on the Reality Check Watch List because of what would appear to be a pipeline stuffed with too much unsold inventory. Much of that, as I point out, is stealth and off the company's balance sheet.
But like grasping at straws, this is a market that wants to find the silver lining whenever possible and give companies that are "less bad," even if it's still bad, the benefit of the doubt.
So despite revenue falling 5.5% -- the second straight quarter of negative revenue growth -- Wall Street preferred to view the decline as better-than-expected and go along with CEO John Chambers' comment that he is "pleased with the progress to return to growth."
Never mind that we've seen this before, with Chambers steering investors down a dusty dirt road:
- May 2013, with comments that caused the stock to zoom: "Cisco is executing at a very high level in a slow, but steady economic environment. We are especially pleased with our ninth consecutive record revenue quarter. We are starting to see some good signs in the US and other parts of the world which are encouraging."
- August 2013: "My confidence in our ability to be the #1 IT Company is increasing." (The stock tumbled on guidance.)
- November 2013: "While our revenue growth was below our expectation..." The stock collapsed.
This time, in an apparent effort to help reignite investor enthusiasm with tone over substance, Cisco helped matters along by directing investors on how to view the company, with an earnings release that was headlined, "Cisco Demonstrates Solid Execution in Q3FY14."
Not every analyst took the bait.
According to a summary from Street Account, JMP analyst Erik Suppiger "remains concerned that CSCO is struggling to generate attractive growth across its growth products..."
And Citi analyst Ehud Gelblum, who rates the stock a sell, "notes Q3 beat was not very satisfying as product revenue declined 8% y/y; points to no change in long-term market forecasts, implying not much has changed overall -- continues to expects CSCO to lose share in switching and routing markets over the next few years as competitive pressures mount."
My own comments on Reality Check said investors shouldn't start to break out the bubbly with deferred product revenue rising 11%. While that may be a good sign at many companies, "At Cisco deferred product revenue represents products at distributors that can't yet be recognized because they haven't yet been sold through to the end customer. (In other words, the pipeline would appear to be getting backed up.)"
Reality: For years Cisco has been a woulda, coulda, shoulda stock. Now it's back to being a "maybe it will" stock in a market that wants to believe it already has. News flash: It hasn't.
-- Written by Herb Greenberg in San Diego