Cisco turns bearish on issuing poor FY17 outlook

On the basis of a decline in public sector business and headwinds faced by the company, we had forecasted a decline in the share price of Cisco. We took an interest to take a short position in Cisco Systems Inc. (NASDAQ: CSCO) by investing in a put option.

At that point in time, the stock was trading at about $34. A week later, the stock fell to $32.50, and our option expired in the money.

We now expect further decline in the stock of Cisco, which closed at $31.33 yesterday, due to the company’s unimpressive revenue guidance for fiscal 2017.

The San Jose, California-based company stated that it now expects fiscal 2017 revenues of $48 billion. This corresponds to a compounded annual growth rate of just 2% for the period between 2014 and 2017. Cisco also issued a slightly better FY17 earnings outlook of $2.39 per share, which reflects a CAGR of 6% for the same period.

Cisco

The company expects the earnings growth to come from an improvement in operating margin and cost cutting.

The company also painted a gloomy picture for the long-term. Cisco stated that it now expects revenue to increase between 1% and 3% over the next 3 to 5 years. Cisco also does not expect any increase in operating margin.

The company also expects project infrastructure platforms revenues to remain flat. Even the security and services revenues are expected to grow between mid-single and high single digits.

It can be noted that the current FY17 revenue guidance is lower than the long-term revenue growth guidance range of 3% to 6% issued at the end of 2013.

In the fourth-quarter of 2017, Cisco’s revenues are expected to decline in the range of 4% to 6% on a y-o- y basis. An increase in competition from several companies such as Arista Networks and Huawei is expected to cause a decline in orders. Additionally, the Open Compute Project (OCP) of Facebook is also having a negative impact on Cisco’s dominance in the switching circuit market. In the short-term, Cisco’s transition to subscription-based model is also likely to affect the revenue growth. Thus, fundamentally, the stock is a sell candidate at this point in time.

A strong resistance is seen at 32 levels in the price chart of Cisco provided below. The momentum indicator has fallen below the reading of 100. Likewise, the RSI is moving below the reading of 50. Thus, we can expect the stock to decline and reach the next major support at 29.50.

On the basis of fundamental and technical analysis, we believe that it would be wise to open a short position in the form of a put option valid for a period of one week. We wish to purchase the contract from one of our dependable binary brokers when the stock trades near $31.50 in the NASDAQ.

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