Cisco (CSCO) Has More Pain to Come Says Gleacher

Cisco Systems (CSCO) will continue to struggle according to Gleacher & Co. analyst Brian Marshall, who recommended for investors to resist the temptation to acquire the stock on low valuation at this time, as its “financial model is likely to continue to deteriorate.”

Marshall pointed to some of the competitors of Cisco, like Aruba Networks (ARUN), F5 Networks (FFIV), Juniper Networks (JNPR) and Acme Packet (APKT) as having carved out some niche positions in markets like Application Networking and WAN Optimization as factors nibbling away at the strength of the company.

Marshall said, "In the mid- to late-1990s (e.g., 1995 to 1999), CSCO grew its total revenue base on average 52.9% Y/Y each year […] However, during the last 10 calendar years, CSCO’s average annual revenue growth decline to just 6.9%, year over year, as the company’s market share began to peak and its core market opportunity became exhausted or fully penetrated. […] If CSCO truly wants to grow 12-17% over the long-term, the company will have to identify the source of the $4.6 billion of incremental annual revenue derived from non-core markets. If one assumes CSCO will remain acquisitive (highly likely), adding roughly $500 million of acquired annual revenue would still leave a $4.1 billion hole relative to plan. The investment community will certainly require more granularity than just the simple statement “the remaining $4.1 billion revenue stream will come from advanced technologies and new market adjacencies”. Many bears believe as CSCO searches for incremental revenue growth outside its core networking/telecom vertical, the company will dilute its current margin profile. In fact, this trend has already begun as operating margins have decline almost 600bps over the past 12 months (e.g., 30.3% in January 2010 to 24.5% in January 2011). If CSCO continues to enjoy success with its new market expansion opportunities (e.g., UCS servers, Flip camcorder, Cius enterprise tablet, etc.), it is inevitable the company will suffer a lower margin profile in the future."

Cisco was trading at $17.27, gaining $0.21, or 1.23 percent, as of 11:45 AM EDT.