Cisco Systems (CSCO) Could Gain Ground After Earnings

Dow component Cisco Systems, Inc. (CSCO) reports fiscal fourth quarter 2020 earnings after Wednesday's closing bell, with analysts expecting a profit of $0.74 per share on $12.1 billion in revenue. The stock rose more than 4% after Cisco beat third estimates and raised fourth quarter guidance in May, adding another 10% into the June high above $48. Cisco shares sold off from that price level but recovered quickly and could hit a new high after the news.  

Key Takeaways

  • Cisco is well positioned to add to share price gains after the earnings report.
  • The stock is still trading well below the 2000 "bubble" peak.
  • China may be holding up a key acquisition for political purposes.

The State Administration for Market Regulation of the People's Republic of China still hasn't approved a merger with Acacia Communications, Inc. (ACIA), announced more than a year ago. The company does considerable business with Huawei, which is on the hot seat for alleged espionage in the United States. Cisco originally expected the deal to close by the end of 2019, so the lack of progress may have political implications.

Wall Street consensus rates Cisco stock as a "Moderate Buy" based upon 11 "Buy" and 8 "Hold" recommendations. No analysts are recommending that shareholders sell their positions at this time. Price targets currently range from a low of $41 to a Street-high $67, while the stock will open Monday's session about $3 below the median $50 target. This positioning should support higher prices if the company meets earnings expectations later this week.

A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to increase shareholder value.

Cisco Systems Long-Term Chart (1990 – 2020)

Long-term chart showing the share price performance of Cisco Systems, Inc. (CSCO)

The stock split eight times in the 1990s during an ascent that posted an all-time high at $82.00 in 2000. It got pummeled when the internet bubble burst, dropping 90% into the 2002 low in the single digits. A bounce into 2004 stalled in the upper $20s, while a 2008 breakout added just five points before failing and reinforcing range resistance. The stock posted a six-year low after the economic collapse and bounced into the new decade, but the rally failed, yielding a successful 2011 test at deep support.

The subsequent uptrend finally reached the 2008 high in 2015, yielding a third quarter breakout that posted healthy gains into the July 2019 high at $58.26. The stock carved a lower high in February 2020 and collapsed with world markets, bouncing strongly at breakout support in May. Unfortunately, the uptick into June failed to reach the prior high, indicating that the correction that started last year is still in force.

A correction is a decline of 10% or more in the price of a security from its most recent peak. Corrections can happen to individual assets, like an individual stock or bond, or to an index measuring a group of assets. 

Cisco Systems Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Cisco Systems, Inc. (CSCO)

The on-balance volume (OBV) accumulation-distribution indicator topped out ahead of price in June 2019 and entered a distribution wave into September. OBV posted a lower high with price in February 2020 and dropped vertically into a 14-month low. Buying pressure since that time has covered about three-quarters of the distance back to the high, just like price. As a result, investor sentiment is providing neither a tailwind nor a headwind at this time.

Price action since June has carved a symmetrical triangle that has a bullish reputation when placed at the end of a strong buying wave. Technically oriented investors have taken note, maintaining buying interest even though price has stalled in the past two months. This is a bullish set-up for a rally that fills the Feb. 13 gap and lifts the stock into the low $50s, where a double top breakdown marks major resistance.

The Bottom Line

Cisco Systems stock is well positioned to add to gains in reaction to Wednesday's earnings report, but heavy resistance in the low $50s could slow or stall upside progress.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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