The networking industry is going through a change at the moment. At the moment, the focus is on the software-based solutions for the industry rather than hardware. The industry was going through a rough patch due to the decreasing demand for networking equipment. Almost all of the players in the industry were facing declining growth. However, a shift towards software-based solutions has given a new life to the networking industry.
At the moment, Cisco Systems (CSCO) looks to be the winner in this sector. The company is capitalizing on the booming cloud computing segment, and due to recent acquisitions, Cisco has set itself up nicely for the future growth.
How Will Growth in Services Segment affect the Company?
Over the past year, products segment of the company grew by just over 5%. On the other hand, services segment grew by almost 12%. For the first quarter of fiscal year 2013, revenue in the products segment has increased by only 3.4% while the revenue in the services segment has increased by over 10%. Services segment is consistently showing double digit growth when the products segment is performing poorly. It is clear that the real growth is coming from the services segment.
Cisco completed eleven acquisitions in the last year, and bought Intucell at the start of this year. Intucell is also focused on developing self-optimizing software that allows mobile carriers to manage cellular networks automatically. Recently, the company has announced the acquisition of SolveDirect, which will be complete in the fourth quarter of the current year. SolveDirect is an Austria based company that provides cloud-based solutions to services providers and enterprises. The acquisition further strengthens the portfolio of the company in the cloud-based services segment.
Cisco's aggressive acquisition strategy is focused on getting as much market share as possible from this rapidly growing market. According to IDC, cloud application revenue will reach $67.3 billion by the end of 2016, growing at a compound annual growth rate of 24%. Furthermore, IDC is predicting that cloud computing needs will drive the demand for servers, and sales of servers will reach $9.4 billion in 2015 to meet this demand. On the other hand, Gartner expects the global spending on public cloud services to reach $210 billion by the end of 2016 - growing at compound annual growth rate of about 17.7%. So, the potential is massive in the segment, which can change the fortunes of the company, if exploited properly. As a result, the company is trying to focus more on the cloud segment to drive future growth.
Is Cisco the Best Investment in the Sector?
Two of the biggest competitors for Cisco Systems are Juniper Networks (JNPR) and Alcatel-Lucent (ALU). Out of these two, Alcatel-Lucent is going through a really tough time, and the company has suffered a lot due to the poor management. There have been some changes at the top management level, which might prove to be beneficial in the long-term. The company needs to control its costs and look at new ways to increase revenues and cash flows. There have been rumors about Alcatel-Lucent and Nokia (NOK) buying out the stake of Siemens in the joint-venture, Nokia Siemens. However, I do not think the company is in a position to take such a step, and instead it should focus on bringing its own house in order. However, at current price levels, ALU might present an attractive opportunity for risk savvy investors. Personally, I would not recommend Alcatel-Lucent at the moment.
On the other hand, Juniper can be an attractive investment. A majority of the analysts following the stock has a hold recommendation, and a consensus price target of $21.25. At the moment, Juniper stock is trading around $18, and if the analyst opinion is taken into account - it can give healthy returns. Furthermore, growth in data will also benefit Juniper. Recently, the company secured a contract with cloud provider PEER 1 to deploy its integrated routing, switching and security technology. However, I believe the prime beneficiary of the boom in the data demand will be Cisco Systems due to its strong position in the segment.
Cisco has gained over 9% in the past six months, compared to just 5% over the past twelve months. The market is visibly excited about the future growth prospects of the company. Recent acquisitions and an increasing presence in the cloud segment have allowed the stock price to go up. I believe Cisco Systems will gain substantially during the current year. In addition, healthy cash dividends and share repurchase program should enhance the total return for investors. The networking industry is starting to grow again, and Cisco Systems is the best investment in the sector, in my opinion.