IE 11 is not supported. For an optimal experience visit our site on another browser.

Cisco CEO stokes fears of ‘downturn 2.0’

Cisco Systems Inc CEO John Chambers' comments on the economy sent jitters through financial markets on Thursday.
/ Source: Reuters

Cisco Systems Inc CEO John Chambers' comments on the economy sent jitters through financial markets on Thursday, stoking fears that a recovery in technology spending could be waning.

Chambers' warning of "unusual uncertainty" and Cisco's weaker-than-expected revenue forecast on Wednesday forced investors to reconsider their views of technology stocks following stellar results from Intel Corp last month.

Chambers, 60, is one of the most influential chief executives in Silicon Valley and investors have learned to listen to his comments on the economy. He was one of the first technology CEOs in 2007 to flag the impact of troubles in the U.S. financial sector, warning of a dramatic decline in orders even as others said they were not affected.

"He's not to be ignored. His view is so broad, so global, and he tells it like it is, and I think he's telling us there's trouble ahead, unfortunately," said Ticonderoga Securities analyst Brian White. "After the tech downturn, he has provided the market with very realistic views of what's happening in the economy and in his business."

A wide range of governments and companies buy Cisco's routers, switches and other network equipment, giving Chambers a close-up view of trends in federal and private investment.

Intel's numbers in July raised expectations that demand for personal computers and servers would spur technology spending. The popularity of smartphones also was supposed to help, regardless of European debt problems and a slowdown in China.

"Within a short period, we've gone through a major downturn, stability, accelerating improvements and now mixed signals," said RBC Capital Markets analyst Mark Sue. "Looks like we're entering yet another downturn."

Cisco forecast revenue this quarter to grow 18 percent to 20 percent from a year earlier, while the average analyst estimate had been for 21 percent growth. Revenue in Cisco's fiscal fourth quarter that ended July 31 rose 27 percent from a year earlier, a touch below expectations.

While analysts said the results were not that bad, investors had grown used to Cisco beating expectations. Many brokerages cut their price targets on Cisco shares, with some lowering ratings as well on Thursday.

"He has a great view of demand around the world and his products are at the heart of a couple of industries," said Fort Pitt Capital Group senior equity research analyst Kim Caughey.

"For him to be kind of a wet blanket, saying they see some softening of demand, that's why people are paying attention to this," Caughey said.

Cisco's late end to the quarter is another reason many look to it as an effective bellwether. Most of its peers reported results for the quarter that ended in June.

"Pretty much across the board, companies that reported earlier said they weren't seeing a slowdown impact their businesses, that Europe wasn't impacting us and the U.S. seems to be growing," said Bel Air Investment Advisors portfolio manager Gary Flam.

"Cisco, which has an extra month, says they're seeing the slowdown impact their business. That's the big takeaway."