Cisco Trading Lower After Citi Downgrade

Dow component Cisco Systems Inc. (CSCO) is trading lower by 2.5% in Tuesday’s pre-market after a major investment bank issued a ‘Sell’ rating on the stock, lowering the price target to $45. The bearish call matches a slow deterioration in sentiment, even though the networking giant is expected to match last year’s quarterly performance when fiscal Q3 2022 earnings are released on May 18^th. The selloff has dropped the stock within a few pennies of November’s low near 51.

Chronic Supply Chain Issues

The stock jumped more than 3% in February after beating Q2 earnings-per-share (EPS) expectations, increasing the dividend by 3%, and announcing a new $15 billion buyback program. However, it topped out in the next session and fell into a consolidation pattern that broke to the downside in Monday’s session.  A Wells Fargo downgrade in March didn’t help bearish sentiment, which has been further compromised by soaring inflation and the Russia – Ukraine war.

Citigroup analyst Jim Suva downgraded the stock to ‘Sell’ from ‘Neutral’ ahead of the opening bell, lowering the firm’s price target while insisting that “current supply chain challenges are more of a headwind for Cisco than for the company’s peers”. However, as he also notes “We emphasize that there are no financial cash flow or going concern issues with Cisco; we simply believe that the stock will trade lower due to valuation multiple compression with inventory issues and share losses.”

Wall Street and Technical Outlook

Wall Street consensus has now dropped to an ‘Overweight’ rating based upon 10 ‘Buy’, 3 ‘Overweight’, and 16 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $54 to a Street-high $72 while the stock is set to open Tuesday’s session about $3 below the low target. This dismal placement highlights a major disconnect with skeptical Main Street investors.

Cisco Systems hit an all-time high at 82 in 2000 and fell to 8.12 when the Internet bubble broke. It’s traded within those boundaries for the last two decades. The slow motion uptrend after buyers returned in 2011 topped out in the upper 50s in 2019, ahead of a December 2021 breakout that ended within two points of the .786 Fibonacci selloff retracement level at year’s end. The stock failed the breakout at the start of 2022 and has incurred a 19% year-to-date loss that’s likely to get much wider in coming months.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.