Cisco: Should we wait for another surprise?

Cisco, Q4 earning report.

Cisco (CSCO), another tech giant, will report its gains and losses this afternoon after the close of the US market. The report will be for the fiscal Quarter ending Jan 2020.

The year 2019 was an amazing year for tech companies, as many believe that the main US indexes such as NASDAQ, Dow Jones and S&P 500, breaching their all-time highs with new records was because of tech companies. So far, Twitter had an expected growth, Amazon had positive reports, Apple grew more than Microsoft, and if we count Tesla (because it looks to be a mostly  tech company, even if is best known for producing a car!), tech companies were just amazing.

In regards to Cisco, according to Zacks Investment Research, based on 9 analysts’ forecasts, the consensus EPS forecast for the quarter is $0.68. The reported EPS for the same quarter last year was $0.67.

I just have to mention here that despite falling from over $58 to $43 in share price, in the second part of 2019, the company had positive reports in all past 4 single quarters.

Check the figure below from NASDAQ.

So far in 2020, the company’s shares have raised by 3%, however, Cisco’s withdrawal from the Mobile World Congress in Barcelona later this month and concerns about COVID-19, which may not affect  this report, will probably affect later quarters, if the Chinese programs for keeping the  virus from spreading, take longer than expected.  As of the latest update, the Chinese officials have claimed that it will be over by April.

The best rated and selling products of Cisco in 2019 were still the Cisco ISR 4000 routers series, Catalyst 2960X switches series, IP Phone 7800 series and ASA5500 series. Although there are many new products, such as ISR900, ISR1100, Catalyst 9300 and the Firepower 2100 Series Appliances… those old men still have strong power! (medium.com) The company’s main income comes from “infrastructure platforms” and “Applications and Security” products (Cisco investor report).

Chuck Robbins and company management are trying to transform the Cisco model from a data networking and communications model to a Security, Applications and Subscription model that moves away from Routing and Switching. These changes in the management and business model got more attention especially after the US-China trade war affected their business, as it affected China’s Huawei as well. Although it is still too early to see its effect, its stock should reflect those changes.

What could make investors worry, with all the new company plans and products, is its cash balance. “Before the share repurchase “bulge” in fiscal ’19, Cisco was generating about $2.5 bl in free cash flow per quarter. Since tax reform was passed in December ’17, Cisco’s cash balance has fallen from $74 billion in January ’18 to $23 billion as of November ’19.” (Seekingalpha.com). It sounds like they are spending lots of cash to keep investors happy and interested.

 

Technical overview:

The all-time high Cisco stock closing price was $80.06 on March 27, 2000 and after that, was $58 in July 2019. After last July’s free fall to $43.40, in December it recovered almost 40% and crossed the 38.2% Fibo level three times, but never had a full weekly candle above.

Now, $47 is the first Support that sits at its 23.6% of Fibonacci level and 20 Weekly MA, and could easily be reached  with a negative report, while with a positive report, $51 (50% of Fibo and 50 weekly MA) is key Resistance, and closing the weekly candle above this level could help the market bulls.

 

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Ahura Chalki

Regional Market Analyst

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