The stock of Cisco Systems Inc. (NASDAQ: CSCO), the largest networking company in the world, is poised for a significant decline due to the mysterious release of spying tools created by the US National Security Agency’s elite group of hackers and the massive 7-percent job cuts.
Impact of NSA Hacking Tools Leak on Cisco
A cache of highly sophisticated hacking tools codenamed Buzzdirection, Epicbanana, Egregiousblunder, and Extra Bacon, among others appeared online just recently, and Cisco products were deemed vulnerable to these. ExtraBacon particularly targets Cisco Adaptive Security Appliance firewall.
This latest news can be considered as an international scandal as the multibillion dollar tech corporation’s networking equipment are used by countless of critical state agencies and large companies all over the world. With these hacking tools leaked out into the internet for all to see, anyone from a basement hacker to a professional spy could gain access to them now. Until these cybersecurity flaws are patched, many computer systems, especially those utilizing Cisco products, may be in jeopardy.
Having said that, we believe that the CSCO stock is set to plunge. As shown in the chart below, the company’s stock is trading in the red for two consecutive sessions. As of the time of writing, the stock is trading at $30.72, down by 1.29 percent or 0.40 points. Our analysis shows that if Cisco breaks down the support at the $30.12 level, it could drop much further.
Cisco: A Layoff Machine
In addition to the leak of NSA hacking tools, reports that Cisco will layoff 5,500 employees or 7 percent of its total workforce also casted a grim shadow over the company. CSCO shares tumbled by 1.5 percent during after-hours trading due to this restructuring move, despite reporting fourth quarter earnings results that beat estimates.
On August 14, 2014, the networking corporation also reduced its workforce by 6,000 or around 8 percent of its global workforce despite posting a profit growth of 18 percent. After the announcement, CSCO shares traded nearly 3 percent lower as shown in the chart below.
During the same period in 2013 (August 14, 2013), the company stunned the tech industry when it also announced job cuts of 4,000 positions, even though it managed to top the analysts’ forecasts for that quarter. The result of this move is also a decline in Cisco’s stock.
(Chart taken from Yahoo! Finance)
Basically, every summer starting 2011 to 2014 and then this 2016, the multinational tech giant reveals massive reductions in the workforce. (July 2011= job cuts involving 6,500 employees; July 2012= a reduction of 1,300 positions.)
In general, when companies implement massive layoffs, it typically suggests weakness. With this, it is unsurprising that the company’s stock is moving to the downside each time it announces massive layoffs. Aside from serving as an indicator of weakness, some corporations also execute job cuts in order to minimize their expenses and increase revenues.
According to Adam Cobb, a management professor at Wharton, “Layoffs may look good on paper because they have an immediate effect on costs. Yet in reality there are a lot of costs that layoffs impose on firms that might not show up on an income statement quite as clearly.”
In short, some companies implement this as a strategy to respond to short-term pressures of ramping up profits, achieving earnings targets and making next quarter’s number.
Future Outlook on Cisco Stock
The recent online leak of NSA hacking tools, including one that specifically targets Cisco ASA software, coupled with the substantial reduction in the workforce should lead to a further decline in the networking company’s stock. Having said that, a Sell position is definitely recommended.
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