Despite Cisco's Below-Consensus Q2 Guidance, Wells Fargo Sees Risk-Reward As Attractive

Although Cisco Systems, Inc. (NASDAQ: CSCO) reported its FQ1 results ahead of expectations, the Q2 guidance was significantly below consensus, driven by weak orders in telco.

Analyst Jess Lubert of Wells Fargo maintains an Outperform rating on the company.

FQ1 Results

Cisco Systems reported its EPS for FQ1 at $0.61, on revenues of $12.4 billion, ahead of the consensus forecasts.

Lubert mentioned that there were several positives during the quarter, such as enterprise orders increasing 5 percent, deferred product revenue rising 19 percent and gross margin of 65.2 percent, driven by mix and continued cost discipline.

The company’s deferred product revenue tied to subscriptions rose 48 percent year-on-year, which the analyst believes suggests that Cisco Systems is “making progress transitioning the business to include more recurring software revenue.”

Stock Performance

Although the stock is likely to trade down following the disappointing guidance, Lubert continues to recommend Cisco Systems due to expectations of carrier weakness proving to be transitory and “potential for success in several key growth markets to drive better results over time.”

In fact, the stock was among the few tech stocks that rallied following the U.S. presidential elections, given President-elect Donald Trump’s plans for large infrastructure projects and likelihood of tad holiday for the company’s offshore bank accounts.

The analyst believes “the risk reward remains attractive given the company remains well positioned in several good growth markets.”

The EPS estimates for FY 2016 and 2017 have been lowered following the FQ1 results.

At last check in Thursday's pre-market, Cisco was down 4.81 percent at $30.05.

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