4 Reasons Cisco Will Be The #1 IT Company

On December 7, 2012, Cisco Systems, Inc. (NASDAQ:CSCO) held its annual financial analyst conference in New York City. During the conference the company's CEO, John Chambers, laid out a plan explaining how Cisco will become the number one information technology company in the world.

By this statement, Chambers does not mean it will be the biggest-selling company. Rather, the CEO says he wants the company to be the most dominant in the minds of customers and to be the one setting the pace in the industry. Being number one, Chambers argued, is about being first in customer satisfaction and profit margins.

But is the pitch realistic?

The short answer is yes. The task will not be easy and competition will include juggernauts of the industry such as Microsoft, International Business Machine (IBM), Oracle (ORCL), Hewlett Packard (HPQ), and SAP AG (SAP)-all of whom have been industry leaders for decades. According to Chambers, "two or three of those [companies] will not be in that list five years from now." Chambers arguments are valid given the transformative impact of cloud computing. Companies that are not able to capitalize on this revolution will become parochial relics at a stroke, and not everyone will be a winner. Cisco's ability to capitalize on the cloud computing revolution will determine if they will stay in the mix of dominant information technology companies, and how well they exceed at this task will determine their chances of becoming the number one information technology company.

I wrote about how Cisco is acquiring its way into cloud computing in my post: "Cisco Snags Another 'Flawless' Acquisition."

4 Strategies to Greatness

Cisco's strategy to become the number one information technology company is comprised of several major components, but there are four that will play the most significant role. The first component of the company's ascent is to create a marketing campaign, which they have entitled "tomorrow starts here". The campaign explains the company's aspirations of becoming the number one information technology company in the world.

The second component, which is by far and away the boldest part of Cisco's plan, is the company plans to double its software business from $6 billion over the next three to five years. Whether or not this is achievable is questionable; however, the shift away from its switching business and towards software will prove beneficial for the company.

By making the switch, Cisco will capitalize on the growing trend of smart phone and tablet users who need to be connected through the cloud. By focusing more on software, the company will be able to capitalize on these enormous shifts in the industry, and it will ensure revenue streams with high margins-one of the company's most important goals.

The third component of Cisco's plan is to continue its astonishing growth in the data center infrastructure. Cisco, which has the most significant networking legacy in the world, will leverage its networking capabilities to support its data center business.

Fourth, the company plans on becoming the leader on the vanguard of software-defined networking ("SDN"). Recently Cisco has made acquisitions in this area by targeting Meraki, a cloud computing company, for $1.2 billion. I wrote about the Meraki acquisition in "Cisco's Meraki Acquisition Will Post Gains for Years to Come."

However, despite Cisco's impressive strategy, the company faces stiff competition.

Oracle will be the most formidable opponent. The company, which has a proclivity for the grandiose, understands the future of cloud computing better than any other company, and has made strategic moves in its software business. Microsoft and SAP have made similar moves after the past year, hoping to gain a stronger footing through the acquisition of cloud computing companies.

Another strong opponent is IBM, which has revenues twice the size of Cisco, despite its recent financial shortcomings. The company, which has reinvented itself several times, is strategically positioned to capitalize on the cloud computing revolution. Since Virginia Rometty took over, the company has moved away from computer hardware to software and services-a trend Cisco is just now beginning to follow. This head start, however, will not be enough. The amalgamation of Cisco's networking hardware, which is the best in the world, and its new focus on its software and services business will enable the company to make up much of this lost ground to IBM.

H-P will be one of the companies that will not dominate the market. The historic company, which has one of the most prestigious names in Silicon Valley, has made more missteps than anyone-well, with the exception of Dell. Under Meg Whitman, the company will refocus on building computers. However, the company has had poor execution and will miss the growth found in the software and services business. If this news was not bad enough, Carl Icahn, the legendary corporate raider, has shifted his takeover focus from Netflix (See "Netflix should Sell Itself") to H-P. It is reported that he is increasing his stake in the company; however, no figure has yet been disclosed.

Conclusion

Cisco finds itself at a pivotal moment in the company's history. Long believed to be the preeminent networking company, the CEO is planning to make a bold move as his years wane. He hopes to move the company away from its traditional business streams into new ones that will capitalize on the cloud computing revolution.

These decisions to reinvent the company are not just for his own personal glorification. Rather, his strategies are the keys to make Cisco the number one information technology company in the world.

To trade Cisco, note that the stock has just bounced up near the $20 area. However, the $18 mark is a good entry price if Cisco undergoes a short-term pullback. In the case of market decline, just above the $16 price point is another good entry. Entering at these prices should give you a low entry price into a strong growth play.

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.