Seeking Alpha
Profile| Send Message| ()  

By Richard Saintvilus

It still appears as if the market is discounting Cisco's (CSCO) long-term potential. This is despite what analysts believe is an imminent rebound in enterprise IT spending. While there are several names to consider that stand to benefit from this recovery, it's hard to imagine that this networking giant wouldn't rank at the top of the list.

A "new Cisco" is emerging

Although Cisco is far from being "back," it's been nonetheless impressive that the company has now managed to string together eight consecutive earnings beats. Yes, there have been some frustrations over the past couple of years. But management is making up for this with some meaningful improvements.

To that end, the most recent quarter delivered the message. The tech giant posted a net income of $2.7 billion, or 47 cents per share on revenue of $12.1 billion. Aside from beating both top and bottom line estimates, both metrics were company records. Revenue grew 5% year over year and 2% sequentially.

Interestingly, though, routing revenue declined more than 5%. Ordinarily this would have been a concern, but Cisco's recent acquisitions suggests that the company has been phasing out its hardware business, including routers, which shed more than 1% sequentially out of the company's overall revenue.

Instead, Cisco understands that its future relies on software. Management also realizes that as companies look to migrate towards software-based network solutions Cisco will need to be better positioned. To that end, the cloud has serve as Cisco's major focus, which makes sense, especially since that market is expected to triple over the next three years -- growing to $177 billion.

Understanding the competition

In the meantime, the weak hardware business is being offset by better-than-expected performance in data center, which grew 65% year over year. Likewise, wireless services arrived solid -- growing at 20% from the year-ago quarter. Cisco continues to outperform rivals such as Riverbed (RVBD) and Juniper (JNPR), which have had a tough time gaining traction amid the poor enterprise spending environment.

However, Oracle (ORCL) just entered the mix with its acquisition of Acme Packet (APKT). Oracle is positioning itself for that inevitable mobile data demand that Cisco has been salivating about, which leaves the door open for more consolidation within the sector. And with Cisco's $46 billion in cash, the company has many routes that it can go and many markets to tackle.

Security just might be one of them. Considering that Cisco is losing market share to Palo Alto Networks (PANW), this may be a direction that Cisco may look to next. With Palo Alto's impressive growth and solid margins, this is an opportunity that Cisco can't afford to let slip away. Meanwhile, Hewlett-Packard (HPQ), which is in desperate need of some new life, may also look to Palo Alto as a way to enter the rising security market.

Cisco investors should be excited that the company is in such a position to transform itself into the type of company that seeks to also make it in the consumer market as well. It's hard not to value Cisco now and it is even more remarkable to think how important its position will likely be in the future as the cloud takes full shape.

Here's making sense

As the market continues to discount Cisco's promise, investors have to realize that Cisco's future depends on some of these deals. The company deserves the benefit of the doubt and more time to execute its mission. And investors should be encouraged by Cisco's willingness to grow in areas where corporate enterprises are clearly heading. With Cisco's cash and long-term growth rate of 6%, these shares are worth at least $30. And when you factor Cisco's decent yield, this is one of the safest and cheapest stocks on the market.

Source: A 'New Cisco' Is Emerging

Additional disclosure: SaintsSense is a team of financial writers. This article was written by Richard Saintvilus, one of our tech analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.