Why Cisco And Citrix Make Sense Together

Oct.18.12 | About: Cisco Systems, (CSCO)

Some investors may be wondering why Cisco (NASDAQ:CSCO), which makes networking hardware, is making such a big deal out of its "cloud partnership" with Citrix (NASDAQ:CTXS), which makes cloud software.

The deal actually extends an existing relationship between the two companies in virtualization. Virtualization is actually one step along the path to cloud, the step most companies are taking right now. By running a virtual operating system on top of a data center, you can squeeze more performance out of your hardware, because a single machine can handle multiple workloads or machines can be combined to handle bigger jobs.

But what this points to, in the end, is a world where hardware in essence becomes software. So it makes sense for a hardware outfit like Cisco to want a software partner, and vice versa.

Specialty hardware may no longer be necessary five years from now in most data centers, but if you can get the software behind your hardware tied to a cloud stack you may stay golden. Similarly, if you have a cloud stack in a competitive market, linking yourself to the leader in networking hardware may increase your market share, and give you viability over the long term.

Look for more deals like this. It's a win-win for both sides, and bullish for both these stocks. But that doesn't mean others won't be doing similar things down the road. They will, as hardware becomes software, and the future gets increasingly cloudy for enterprise vendors.

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.