The Ratings Game: Cisco, HP, NetApp are vulnerable to a ‘deterioration’ in enterprise spending, Goldman warns

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Enterprise spending will continue to “deteriorate,” according to Goldman Sachs, and that could pose problems for several large tech stocks.

Cisco Systems Inc. CSCO, -1.80% is one of the key companies at risk, Goldman Sachs analyst Rod Hall wrote Thursday, as he expects challenges both with enterprise spending and telecom spending. His research indicated weaker enterprise spending overall in August and September with expectations for further “deterioration” into October and November.

“We believe that most of this weakness relates to a lack of business confidence at large enterprise driven by trade volatility as opposed to a broader macro slowdown,” Hall wrote. For Cisco specifically, he points to the company’s 2% drop in enterprise product orders in the July quarter, a trend he expects to worsen heading into the election season.

Hall downgraded Cisco’s stock to neutral from buy on Thursday, lowering his price target on the shares to $48 from $56. He has a more negative view of HP Inc. HPQ, -2.01%  and NetApp Inc. NTAP, -2.24%, both of which he downgraded to sell from neutral, citing expectations for enterprise struggles.

See more: Cisco stock falls after Goldman Sachs downgrade

On HP, Hall worries that the commercial PC market will weaken in 2020 as the Windows 10 migration cycle ends. He draws a comparison to 2014, when the commercial PC market saw a double-digit drop in the wake of strong growth driven by the Windows 7 migration cycle. Such pain this time around would add to “already weak” consumer PC performance, in Hall’s view.

“While we don’t believe we are yet into a broad consumer downturn we do continue to pick up data points suggesting regional weakness in Europe and Asia,” he wrote.

Read: HP’s stock slides on concerns that its new strategy is ‘fraught with risk’

Hall’s expectation that trade fears and economic uncertainty will weigh on enterprise spending also threatens to hurt NetApp, which has also been struggling with execution issues.

“We believe NetApp’s [Enterprise License Agreement] guidance of 2% of total revenue in FY’20, which is heavily second-half loaded, may be hard to achieve given that these deals tend to be more prevalent with larger enterprise customers,” he wrote.

NetApp’s stock is off 1.8% in Thursday morning trading, while HP’s stock is down 1.9% and Cisco’s is down 2% on a day when the broad market is rising. The S&P 500 index SPX, +0.83%  is up 0.9% in Thursday’s session and the Dow Jones Industrial Average DJIA, +0.77%, of which Cisco is a component, is up 0.9%.