Following a disappointing quarter from networking bell weather Cisco (CSCO) - Get Report , some on Wall Street are warning that the fallout could reach others in the space, especially those looking to make sales to the federal government.
"We believe the results bode poorly for Fortinet (FTNT) - Get Report , MO, $41 PT) and Palo Alto Networks ( (PANW) - Get Report , MO, $155 PT), particularly given that our industry contacts suggest turnover is elevated in the sales organizations of both," wrote Erik Suppiger of JMP Securities in a note Thursday. "We view shares of Cisco as fairly valued, trading at 13x our CY18E EPS estimate."
Shares of Cisco tumbled on Thursday as the networking giant topped forecasts for the third fiscal quarter but reported weaker-than-expected guidance for the fourth quarter in part due to weakness in public sector business.
Cisco traded down about $2.61 apiece, or 7.73%, to $31.21 Thursday. Shares of Fortinet were down about a percent to $39.22 on Thursday as were shares of Palo Alto, which traded hands at $113.59 per share.
Fortinet said in its earnings release on May 3 that it had gained "limited traction in sales to U.S. federal government agencies, and any future sales to government organizations is uncertain."
Cisco earned 60 cents per share, exceeding Wall Street expectations of 58 cents per share, according to FactSet. Revenues of $11.94 billion topped forecasts of $11.89 billion in sales.
The company reported that it expects fiscal Q4 revenue to be down 4% to 6% from the prior year, compared to consensus estimates for revenue to be down 1% to $12.52 billion. EPS guidance of $0.60 to $0.62 compared with a $0.62 consensus.
TheStreet's Jim Cramer, who owns Cisco in the Action Alerts PLUS portfolio, wrote in a recent post that the pullback in shares is disappointing but that these "hiccups can happen" when a company as big as Cisco undertakes a massive restructuring plan."
While Cisco-fallout may be felt by some in industry some aspects of the company's earnings actually bode well for its competitors.
Suppiger of JMP said that Cisco's 42% year-over-year growth in its datacenter business bodes well for Arista Networks (ANET) - Get Report , the Santa Clara, Calif.-based cloud networking solutions company.
Cisco and Arista were recently involved in a patent dispute in regards to networking equipment. On May 5 the U.S. International Trade Commission upheld a previous ruling that the company infringed on two Cisco patents related to networking equipment, The Commission called for an import ban and issued a cease and desist order on the related products.
Arista shares were up about $1.00, less than a percent, to $143.23 per share in midmorning trading Tuesday.
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