Cisco's Bellwether Status Is Fading
By Dan Gallagher
It was once taken as gospel that when Cisco Systems sneezed, the entire tech industry caught a cold. But even in a pandemic, the network-equipment giant is less infectious than it used to be.
The market's reaction to Cisco's latest results provide a good example. Cisco reported a 9.5% year-over-year drop in revenue for its fiscal fourth quarter and projected an even bigger decline for the current period, which ends in October. This would amount to Cisco's biggest sustained weakness in more than a decade, as many of its customers curtail spending amid the pandemic. Cisco's share price was down more than 11% by midday Thursday -- on pace for the stock's largest single-day decline since early 2011.
That weighed on the Dow; Cisco is one of only five tech names in the blue-chip index. Other aging tech giants heavily exposed to corporate spending also took a hit, including IBM, Hewlett Packard Enterprise, Dell and HP. But other tech segments largely shrugged off the news. The S&P 500 Software and Services Group and BVP Nasdaq Emerging Cloud Index, in particular, made notable gains as did Microsoft, Amazon and Google-parent Alphabet, which operate growing cloud-computing services that also depend heavily on technology spending by major corporations.
Cisco's place in that food chain isn't what it once was, as businesses push more of their computing needs to cloud providers. And the pandemic appears to have accelerated those efforts, as remote work drives the need for more cloud-enabled services. A recent Goldman Sachs survey of chief information officers predicted that 43% of computing workloads will be on public cloud services by mid-2023, compared with 23% now. The same survey found that CIOs expect Cisco to drop to third place among their top strategic IT vendors in that time, to be replaced in the No. 2 spot by Amazon.
It should be noted that the same survey three years ago predicted Cisco would drop to 7th place by now. Instead, the storied giant has held on just behind Microsoft. That's an indication that Cisco's business is more resilient than even many of its biggest customers once believed. But it also shows that Cisco will have to keep fighting hard just to keep its piece of a shrinking pie.