Cisco Systems, Inc.’s (CSCO) Bleak Outlook Hits Technology ETFs

new etfsOne of the tech bellwethers, Cisco Systems (NASDAQ:CSCO) once again disappointed investors with weak revenues and a bleak outlook in its fiscal 2014 first quarter release.

Though the company earnings of 48 cents a share beat the Zacks Consensus Estimate by a penny, it failed to deliver on the top line. Revenue grew 2% to $12.1 billion, but missed our estimate of $12.3 billion and well below management projection of 3%-5% growth(read: Forget Big Tech; Buy These ETFs Instead).

This sluggish performance was mainly due to weak demand in emerging markets like China and the impact of the recent government shutdown on business spending. Sales in Russia and Brazil dropped 30% and 25%, respectively, while sales in Mexico and China were down 18% in the quarter.

The US National Security Agency spying scandal has taken a toll on the sales of China and other emerging markets including Brazil, Mexico and India in the previous quarter and is expected to hamper the current quarter as well. This suggests that these nations may not be able to power broad CSCO growth in the future, and that the company may have to look elsewhere for earnings gains.

The network equipment maker expects revenues to fall as much as 8%–10% in this quarter due to sluggish emerging markets. It also projects earnings per share in the range of 45–47 cents, which is below the Zacks Consensus Estimate of 48 cents. Further, Cisco warned of challenging business in the coming months.

Market Impact

Led by the emerging market bearishness and some gloom over the company’s outlook, 17 analysts cut their target prices on the stock while two downgraded their ratings. This move spread pessimism on the growth of the network equipment company. This is further supported by our negative outlook as the stock has a Zacks Rank #4 (Sell).

This was obviously poorly received by investors in CSCO, leading to a sell-off. Cisco shares tumbled nearly 11% at the close on Thursday trading volume on elevated volume. The news also hurt the broad tech space since CSCO is a bellwether for many firms in the sector.

Due to this, a number of other players in the space also traded lower in the session, falling in tandem with Cisco. Some of the players include Hewlett-Packard (HPQ) – down 5.4%, EMC Corp. (EMC) – 1.94% and IBM Corp. (IBM) – down 0.73% (read: 3 Tech ETFs to Watch on IBM Revenue Miss).

This broad weakness is actually best represented by the following ETFs, as these funds have the biggest allocations to CSCO and thus could be the most in focus thanks to the earnings report, or any future selling in the segment should expectations fall for tech in light of CSCO’s announcement:

iShares North American Tech-Multimedia Networking ETF (IGN)

For a concentrated play in the networking space, IGN could be worth a closer look. The ETF follows S&P North American Technology-Multimedia Networking Index and holds 26 securities in its basket. Cisco takes the third spot at 8.69%, trailed by Motorola (MSI) and Qualcomm (QCOM) with 9.76% and 8.86% share, respectively.

The fund has accumulated $247.8 million while sees a good volume of nearly 52,000 shares a day. Expense ratio comes in at 0.48%. The fund saw a heavy loss of 1.91% in a single trading session yesterday while five-day return is still up 1.84%.

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