Updating Cisco and CREE

 | Aug 15, 2013 | 10:30 AM EDT
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Cisco: Communication Breakdown

On Tuesday, I was looking for signs of life at Cisco (CSCO). I was not particularly enthused about the company. I thought Cisco had three points of upside at best. 

On Wednesday, the company reported an in-line quarter. The results were almost exactly what I (and the rest of the analyst community) thought. The company reported $0.52 per share on revenues of $12.42 billion. (The accounting at Cisco is so funky the company can hit any earnings number they like. But that's a discussion for another time.)

Management guided the first fiscal quarter to between 3% and 5% revenue growth. When you do the math, that works out to $12.5 billion. The first quarter is a seasonally-weak quarter for the company, so the lack of any sequential growth isn't a surprise. On the call, management guided gross margins to a range between 61% and 62%, which was within the consensus estimate of 61.97%. The guidance is exactly in line what the Street was expecting.

After hours the stock sold off sharply as some investors were surprised by the announcement that the company would lay off 4,000 workers. That is in addition to the 8,000 that got kicked to the curb over the last two years.

CEO John Chambers complained the company has too many middle managers and an unwieldy bureaucracy. (So I guess that lays bare the lie the company would do lots of hiring if the U.S. tax laws were changed so the company could repatriate its cash.)

Cisco's stock is a heavily-shorted. The short thesis on Cisco is the "vanity" thesis, which states the new waves of equipment buyers don't buy vanity, name-brand products. When you are deploying 25,000 servers in order to build a cloud computer offering, you don't need to buy name brand servers. You can't afford it.

Likewise, when you are buying switching and routing, Cisco's equipment is far too expensive for any new large-scale equipment deployment. That is the thesis the shorts (including me) have been using against F5 Networks (FFIV). That's why I'm not particularly enthused with Cisco longer term. I think its switching and routing business will be under pressure for a long time to come.

CREE: Lights Out

Shares of LED giant CREE (CREE) plunged 22% on Wednesday when the company announced guidance that was lower than expected. Back on June 4, I warned readers that CREE's prospects were dim.

I predicted the company would cut guidance. It's clear competitive pressure, primarily from Koninklijke Philips (PHG) has begun to impact CREE. I would be reluctant to buy CREE's stock on this dip, as I don't think management has cut its outlook enough. I think CREE will be a serial disappointer and would look for the stock to go lower.

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