Here's Why You Should Offload NetScout Systems (NTCT) Stock

On May 24, Zacks Investment Research downgraded NetScout Systems Inc. (NASDAQ:NTCT) to a Zacks Rank #5 (Strong Sell).

The downgrade can be primarily attributed to negative estimate revisions over the last 30 days. Notably, the Zacks Consensus Estimate for 2018 has declined 6.6% to $1.69 over the said period. For 2019, the estimate is currently pegged at $1.97, reflecting a 6.19% decline over the same time frame.

The negative estimate revision was primarily due to mixed fourth-quarter fiscal 2017 results and back-end loaded fiscal 2018 top-line guidance. Although earnings (including stock-based compensation) of 58 cents per share beat the Zacks Consensus Estimate by 3 cents, revenues of $327.2 million missed the consensus mark by a whisker.

We also note that shares of NetScout have underperformed the Zacks Computer-Office Equipment industry on a year-to-date basis. While the industry gained 18.3%, the stock returned 12.8%.

Gloomy Outlook Disappoints

NetScout projects fiscal 2018 non-GAAP revenues to be relatively flat compared with fiscal 2017 levels. The company expects to achieve 40% of its revenues in the first half of fiscal 2018, which is lower than 45% achieved historically. The lowered expectations can be attributed to weak service provider end-market as well as tough comparisons from the Arbor product line.

Moreover, the company is set to launch a number of new products at the enterprise vertical, which will take some time to contribute meaningfully to the top line. NetScout believes that this will impact revenue growth in the first half of 2018.

Nevertheless, NetScout forecasts earnings of $1.92 per share for fiscal 2018, reflecting mid-single to high-single digit percentage growth over fiscal 2017, driven by improving operating margin.

Per management, service provider segment revenues (around 56% of the total revenue) are expected to decline in the first-quarter of fiscal 2018 due to lower spending from Tier 1 service providers in the U.S. The company expects revenues from a significant Tier 1 customer to decrease around $35 – $40 million on a year-over-year basis.

NetScout anticipates earnings to be in the range of 5–8 cents per share for the first quarter of 2018. The Zacks Consensus Estimate is currently pegged at 2 cents, which reflects 14.3% decline on a year-over-year basis.

Stocks to Consider

Better-ranked stocks in the broader sector include Applied Optoelectronics (NASDAQ:AAOI) , Applied Materials (NASDAQ:AMAT) and Extreme Networks (NASDAQ:EXTR) . While Applied Optoelectronics and Applied Materials sport a Zacks Rank #1 (Strong Buy), Extreme Networks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term growth for Applied Optoelectronics, Applied Materials and Extreme Networks is estimated to be 20%, 16.58% and 17%, respectively, which is better than NetScout’s 14.5%.

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