Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Cisco Systems (CSCO +0.34%) is one of the worst performers on the Dow Jones (^DJI 1.01%) roster today. Shares of the networking equipment maker dipped as much as 2.6% overnight. What did it take to slash nearly $3 billion off a Dow component's market cap?
One grumpy analyst note.
Tech analyst Ehud Gelblum from Citigroup started covering Cisco with a sell rating and an $18 price target, more than 15% below Tuesday's closing price.
Gelblum sees the entire telecom equipment market peaking right about now as American networks put the finishing touches on their 4G LTE systems. Chinese LTE installations are just about to get started, but that won't help Western equipment builders very much since most of those orders are likely to go to homegrown alternatives like Huawei and ZTE.
On top of the expected sector weakness, Gelblum thinks Cisco is losing market share even outside China, mostly to French-American rival Alcatel-Lucent (NYSE: ALU). The Citi analyst recognizes that his views are unusually pessimistic.
Slowing revenue growth and uncertainty around Cisco's formerly dominant market position led Gelblum toward 2016 forecasts "over $2 billion below Street revenue and $0.20 below earnings per share." Alcatel is bringing competitive big-iron router products to market while Cisco might confuse customers with too many products designed for the same telecom-oriented tasks.
As you might expect, Alcatel-Lucent shares jumped as much as 3.7% higher on the same Citi notes, which included a buy rating on Alcatel.
Gelblum's rating is new because he recently joined Citigroup. In his previous gig at Morgan Stanley, Gelblum held a neutral rating on Cisco when the stock cratered in 2010 and 2011, then switched to a buy rating just as Cisco bounced off a temporary bottom. Following his advice on Cisco throughout the Morgan Stanley stint, investors would have nearly doubled the Dow's returns over almost two years.
I would agree with his telecom equipment view, but am scratching my head over the sudden love for Alcatel-Lucent. That company has been in hard-core turnaround mode for the last several years, relying on fresh debt and asset sales to stay afloat. Yes, Alcatel knows how to build a fine high-speed router, but so does Cisco. The occasional sale might fall through to Alcatel, saving the smaller rival's long-term bacon, but I see no reason why telecoms everywhere would suddenly prefer a vendor with precarious finances over one with billions in the bank and a history of market dominance.
So take this particular note with a grain of French sea salt. Cisco may be losing some market share to Alcatel-Lucent and others, but hardly enough to justify a 15% share price plunge. Chances are, the market already priced in all the signs of Cisco's recent troubles.
