Troubled Waters for a Handful of Telecom and Networking Equipment Manufacturers


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With the first quarter of 2022 over, it goes without saying that Wall Street analysts began weighing their thoughts on what to expect from the next round of tech earnings reports.

And in the opinion of Morgan Stanley’s Meta Marshall, “cautious” is how investors should view leaders in telecommunications and networking equipment.

Marshall said profits for these companies are expected to increase in the near term due to the effects of tighter-than-usual supply chains. However, future issues affecting the sector are likely to weigh on investor sentiment in the second half.

“We are now starting to see signs of weakness building up,” Marshall said in a report on the outlook for the telecommunications and networking market. Marshall said that according to equipment dealers, a combination of higher business costs, heavy IT spending over the past year and concerns about Russia’s war on Ukraine, “is making customers more weary to the idea of ​​incurring large capital expenditures for new orders.

Marshall said a “catalyst for underperformance” will be company feedback on how they see future demand and orders playing out, limited earnings growth expectations and continued cost increases that could “be prove more difficult to be fully absorbed by customers”.

Marshall already had a not-so-exciting note online [analyst speak for “neutral”] on the telecommunications and network equipment sector, but after having assessed the group’s situation in view of the next earnings season, it turned to caution.

“Although we do not expect any significant cancellation of orders and we can still see [order] arrears are piling up [first-quarter earnings] reports, we’re more cautious on the pace of orders in the second half,” Marshall said.

As part of its new cautious view of telecommunications and networking equipment manufacturers. Marshall reduced his rating on Hewlett Packard Enterprise (NYSE: HPE) to an underweight, or equivalent to sell, of equal weight, and downgraded its opinion of NetApp (NASDAQ: NTAP) and F5 Networks (NASDAQ: FFIV) at equal weight from overweight.

Regarding NetApp (NTAP), Marshall said the company set “tough” revenue and earnings targets at its recent analyst meeting, and there were “fewer opportunities” for the company. company’s cloud business to counter weak hardware sales. Marshall also cut NetApp’s (NTAP) stock price target to $91 per share from $102.

Marshall said she still believes in F5’s (FFIV) “software transition” story, but like NetApp (NTAP), it struggles with its weaker hardware systems business. F5 (FFIV) relying on hardware for around 25% of its revenue, Marshall said it would be “more difficult” to focus on its software managers in the short term. Marshall also removed F5 (FFIV) from his top pick in the networking sector and lowered his price target on the company’s stock to $250 per share from $280.

Marshall said HPE (HPE) still sees strength in its high-performance computing [HPC] offers and the Aruba Networks subsidiary. However, Marshall said HPE (HPE) would likely see challenges coming from its slower-growing storage and server business, which accounts for about 60% of the company’s total revenue.

In addition to cutting its rating on HPE (HPE) stock, Marshall also cut its price target on the company’s stock to $15 per share from $17.


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