Telecom and networking complement each other in terms of products and services. The opportunity here is huge given the growth of data consumption, deployment of 4G networks, and build-out of data centers. According to Plunkett Research, the global telecom industry is expected to be worth $5 trillion in 2013 and further growth is expected going forward.
Two companies that have established global acceptance for their products and stand to gain from the above-mentioned trends include the likes of Alcatel-Lucent (ALU) and Cisco Systems (NASDAQ:CSCO).
Both these companies are market leaders. Let me try discussing each of these companies individually.
The company has delivered revenue growth despite a brief slowdown in the networking market. A diversified product portfolio has helped Cisco in keeping its growth intact. An important area where Cisco is looking to establish its footprint is in cloud computing as I had discussed in a previous article.
In addition, Cisco continues to dominate the router and switches market. It commands over 60% of market share in the Ethernet switch market. Cisco's goal is to maintain this share in the switching market.
The company is focused on tapping the growing demand for fast port switches in data centers. Higher demand for high speed switches has led to solid sales of Cisco's 10G products. Nexus and Catalyst series of switches are also gaining momentum. The Nexus portfolio registered growth of 20% in the last quarter, which shows that Cisco's data center portfolio of switches is ramping up nicely.
The company's UCS (Unified Computing System) segment has gained good popularity and is among the preferred choices for customers globally. In integrated solutions, Cisco is leaving no space for competitors and its alliance with companies like NetApp (NASDAQ:NTAP) for Flexpod and VCE for Vblock have helped it broaden the scope of UCS.
I feel that Cisco will remain a solid long-term investment as it strengthens its position in the UCS market and also maintains its position as the global leader in switches. On the other hand, the Sourcefire acquisition should strengthen Cisco's security products division. Hence, it is clear that Cisco is looking to profit in all possible ways from the networking and telecom industry.
Alcatel-Lucent is also showing its strength in the networking and telecommunication segment of late. Alcatel is moving up the ladder in the market for switches and routers, and currently ranks second with arch rival Cisco as number one. Alcatel took over Huawei for the second position although it's a tight fight for number two between Alcatel, Huawei, and Juniper.
Looking ahead, Alcatel's alliance with Qualcomm to develop small cell base stations for enhancing wireless connectivity for 3G, 4G and Wi-Fi users could result in robust growth.
The fusion of the two stalwarts will also facilitate the development of Alcatel LightRadio, which will use the FSM9900 Chipset manufactured by Qualcomm. Driven by the increasing sales of smartphones, tablets and various devices that are using high-bandwidth applications, ISPs are looking for cost-effective solutions to improve network performance.
Small cell base stations provide the required cost-effective solution, which means that Alcatel's joint venture with Qualcomm is a move in the correct direction. Alcatel's LightRadio portfolio enhances network capability at a lower cost per bit.
Cisco is the clear leader in the networking and telecom industries. However, Alcatel has been making some good moves of late. Alcatel's tie-up with Qualcomm (NASDAQ:QCOM) in small-cell technology is worth tracking going forward, along with Cisco's moves to maintain its dominance.
Investors looking for a safe play in the sector should take a look at Cisco while the more adventurous ones could take a look at Alcatel, which is in turnaround mode and has gained a massive 170% this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.