Why Cisco Systems Inc. Shares Might Pull Back

Does this analyst make a good case or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 8, 2014 at 9:31AM
Technology and Telecom

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Cisco Systems (NASDAQ:CSCO) fell nearly 1% in premarket trading Tuesday after Wunderlich downgraded the networking gorilla from buy to hold.

So what: Along with the downgrade, analyst Matthew Robison lowered his price target to $24 (from $25), representing about 5% worth of upside to yesterday's close. So while contrarians might be turned off by Cisco's price strength over the past month, Robison's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched. 

Now what: According to Wunderlich, Cisco's risk/reward trade-off is rather attractive at this point. "We came away from industry interviews in recent weeks with the view that the market has less interest in the Cisco product suite than in past transitions," said Robison. "We see the range of alternatives for network automation/software defined networking (SDN), network function virtualization (NFV), and cloud services as dilutive to the Cisco installed base upgrade opportunity." Of course, when you couple Cisco's still-massive scale advantages with its 3%-plus dividend yield, conservative long-term investors might want to take Wunderlich's bearishness with a grain of salt.