Cisco Systems (CSCO, Financial) is making a comeback. The stock has gained an impressive 20% in 2014 after witnessing some weakness at the end of last year in the emerging markets. In fact, Cisco is trading very close to its 52-week high, but, given its focus on delivering products with innovation, speed, agility and effectiveness, its performance can continue improving in the future. Moreover, Cisco is transitioning its business model from selling boxes and standalone services to selling architectures and solutions. This is another positive that investors should consider as Cisco will be able to benefit from a number of end markets.
Tapping software-defined networks
For example, Cisco is witnessing strong growth in software-defined networks, or SDN, with its application-centric infrastructure. In the first quarter, it had over 900 Nexus 9000 customers versus 580 in the last quarter. It has more than doubled the customer base for APIC and ACI controllers that enable automation and programmability of the network. Thus, Cisco is witnessing rapid growth in its customer base in SDN, and this is a trend that's expected to continue going forward. According to an IDC report:
"The worldwide SDN market for the enterprise and cloud service provider segments will grow from $960 million in 2014 to over $8 billion by 2018, representing a robust CAGR of 89.4%. This forecast for the SDN ecosystem includes in-use physical network infrastructure, controller and network-virtualization software, SDN network and security services and related applications, and SDN-related professional services."
The good thing is that Cisco is involved in almost all aspects that are expected to drive the growth of this market. As a result, its various products aimed at SDN are gaining strong traction. In fact, the company saw double-digit order growth for the Nexus 3K, 7K, 9K and ACI products combined. Cisco also signed a record 600 new customers for the Nexus 3000 in the first quarter.
Intercloud: Another key opportunity
Beyond SDN, Cisco is focusing on emerging growth areas of technology like the Cloud and the Internet of Things. The networking-gear company predicts that by 2018, almost 75% of company information will be processed via the cloud rather than in-house computer servers. Cisco is pumping in around $1 billion more into Intercloud. Again, considering the prospects of Intercloud, this is not surprising. Looking ahead, data usage is expected to grow at a rapid pace. As per A.T. Kearney, "global spending on Big Data hardware, software and services will grow at a CAGR of 30% through 2018, reaching a total market size of $114B."
Now, Cisco is looking to connect the Cloud network with a single platform with its Intercloud strategy. According to a report:
"Cisco is investing $1bn over the next two years to create what it claims will be the world’s largest open, interoperable cloud network that lets customers easily shift workloads across public and private clouds, locations and service providers."
With this move, Cisco will be able to provide customers an interconnected platform, allowing them to make decisions faster. As such, it is not surprising to see that this platform is fast gaining traction. In fact, Cisco recently added over 30 new Intercloud partners.
The emerging market challenge
Cisco still faces a stiff challenge in the emerging markets, with revenue dropping 6%, with China being the main reason behind the heavy drop. In a cyber dispute between China and the U.S., the former is targeting companies like IBM (IBM, Financial) and Cisco. However, a breather in BRICS can be India, with its “Make in India” push being pursued by the new government. Cisco is said to be testing the Indian market with a $5 billion proposal for the next five years.
There is a lot of opportunity in India, as "the domestic demand of electronic goods is projected to grow to $400 billion by 2020, of which domestic production can cater to only $100 billion." Cisco can help bridge this gap with its investment plan as it is looking to manufacture switching equipment, set-top boxes, routers, etc. to cater to this market.
Conclusion
Cisco is following a smart strategy to power its long-term growth. By focusing on growth markets such as SDN and Intercloud, apart from a fast-developing market such as India, Cisco is on the right track. As such, even though Cisco is trading at the higher end of its 52-week band, the company is still capable of delivering more upside.
