Morgan Stanley analyst Meta A Marshall has revisited the firm’s research coverage of Telecom and Networking Equipment stocks as the sector continues to suffer from supply chain headwinds.
As a result, the analyst downgraded the industry view to Cautious.
“While Q4 earnings and TMT presented a more optimistic outlook that supported this take, we are now starting to see signs of weakness accumulate, in particular, a more cautious flash survey on hardware, and most notably, reseller checks noting softer 2H pipelines. Resellers have been noting in recent checks that a combination of 1) Ukraine conflict, 2) higher underlying costs of doing business and 3) strong IT spending over the last year are making customers more weary on larger capex orders, causing smaller 2H pipelines to build than expected,” Marshall said in a client note.
Moreover, Marshall downgraded shares of F5 Networks (NASDAQ:FFIV) and NetApp (NASDAQ:NTAP) to Equal Weight from Overweight with price targets of $250.00 and $91.00, respectively.
“We believe that over a multi-year period, FFIV and NTAP will still likely outperform the market and their respective networking and storage comps. However, with ~25% of FFIV's business still being hardware driven, a more difficult 2H FY setup and weakening macro demand data points, we think it will be more difficult to focus attention in the NT on the software story, particularly with 35-40% software growth targets already established,” Marshall added.
The analyst also downgraded Hewlett Packard Enterprise (NYSE:HPE) from Equal Weight to Underweight with a price target of $15.00 per share, down from $17.00.
“While valuation of HPE is not challenging at 7.5x 22e P/E and 11x 22e P/FCF, and cash balance provides meaningful optionality, a combination of weak CIO data, VAR commentary, exposure to servers / storage (60% of revenue) with less backlog buffer, and European concentration (37%), we expect the stock to underperform over the next 12 months,” Marshall concluded.
By Senad Karaahmetovic