NEW YORK (TheStreet) - Cisco (CSCO) shares fell 0.19% to $25.92 following a downgrade from Pacific Crest Securities, as a result of the stock risk in the coming battle for cloud computing could lessen Cisco's multiple and margin expansion.
The San Jose-based Cisco is at a crossroads in the cloud business that leaves analysts uncertain about the stock's performance in the short run. Pacific Crest analysts Brent Bracelin expect that "enterprise adoption of cloud and new software technologies is reaching a tipping point," and as a result, there will be an increase in the amount of consolidation for the communications and networking industry. The mega-cap communications and networking giant has a strong position for the coming M&A activity because of the large pile of cash they keep on hand, which Pacific Crest now says exceeds Cisco's revenues.
Pacific Crest downgraded shares to "sector perform" from "outperform."
Cisco may be ready for increased consolidation, but acquisition costs could have a negative impact on the company's multiple. "We have high confidence in management's ability to protect profits during challenging periods but are now less confident that margins and multiples can expand meaningfully next year as it accelerates its cloud strategy," Bracelin and Hutchinson wrote in the research report.
Cisco has risen 14% from a year ago compared to the S&P's rise of 8% over the same time period.
Even if Cisco does acquire smaller players in their field, doing so could put an end to the margin growth Cisco has been seeing recently. By doing so, the company could put itself into a similar situation as when it moved into the server business, according to the analysts. That subsequently caused a major wave of M&A activity in the industry that created competitive overlap and price wars between Cisco, IBM, (IBM) and HP (HPQ).