Cisco Faces Challenges Amidst AI Focus as Networking Gear Demand Wanes

Cisco Stock

Cisco Systems (NASDAQ:CSCO) witnessed a more than 3% decline in shares on Thursday following a reduction in its annual revenue forecast and the announcement of job cuts. The networking equipment giant attributed these moves to sluggish demand from telecommunications companies and cable service providers.

CEO Charles Robbins pointed to a weak macro environment, expressing concerns over caution and scrutiny surrounding deals. Analyst James Fish from Piper Sandler remarked on Cisco’s overestimation of demand, leading to a downward revision of FY24 expectations amidst a networking downturn excluding AI investments.

With plans to cut over 4,000 jobs, Cisco adjusted its annual revenue forecast to $51.5 billion to $52.5 billion, down from the previous projection of $53.8 billion to $55 billion. The market responded with Cisco’s share price dropping to $48.75, potentially resulting in a loss of over $6 billion in market value.

To counter the tepid demand for networking gear, Cisco has been pivoting towards AI and cybersecurity. CEO Robbins highlighted an agreement with AI chip leader Nvidia (NASDAQ:NVDA) to use Cisco’s ethernet with Nvidia’s technology, emphasizing its relevance in data centers and AI applications.

Analyst George Notter from Jefferies noted Cisco’s increased pipeline associated with AI projects, signaling positive traction. However, he emphasized that this progress remains relatively modest compared to the company’s overall operations.

Cisco anticipates closing its $28 billion acquisition of cybersecurity firm Splunk earlier than previously estimated, demonstrating its commitment to enhancing its cybersecurity portfolio.

Despite these efforts, Cisco faces challenges amidst waning demand for networking gear. It trades at a lower PE multiple compared to competitors like Juniper Networks (NYSE:JNPR) and Arista Networks (NYSE:ANET), indicating a potentially more attractive investment opportunity, but the company must navigate the evolving landscape to sustain growth in the face of shifting market demands.

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