Cisco (NASDAQ:CSCO) experienced a sharp decline of over 12% on Thursday, prompted by a reduction in its annual forecasts, sparking concerns that excessive inventory with customers was hindering new orders in its primary networking equipment business. The company’s market value was set to drop by over $25 billion, considering its share price of $46.90, following the adjustment of profit and revenue projections for fiscal year 2024 announced on Wednesday.
Cisco attributed the weakened outlook to a slowdown in orders in the first quarter, noting that “customers are currently focused on installing and implementing products in their environments.” As part of its strategy to diversify from one-time purchases of expensive equipment, Cisco has been transitioning toward more recurring software offerings, including cybersecurity packages. This shift involved fulfilling its backlog of orders this year, following challenges posed by supply-chain issues.
Jefferies analyst George Notter highlighted that Cisco has now depleted its excess backlog, leading to a decline in revenue run rates. He noted that, like many other companies, Cisco is grappling with excess customer inventory, a consequence of the supply chain challenges over the past two years.
Several brokerages responded to Cisco’s revised forecasts by lowering their target prices for the stock, with the median view settling at $54 – nearly 70 cents higher than the stock’s last closing price. Cisco currently trades at over 13 times its 12-month forward earnings estimates, exceeding the industry median of 10.98.
In light of the backlog buildup and weaker-than-expected demand, Morningstar analyst William Kerwin characterized the fiscal year 2024 as more of a correction year for Cisco. The market’s reaction to Cisco’s revised forecasts underscores the challenges faced by companies navigating the complex landscape of supply chain disruptions and the adjustment to recurring revenue models.
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