Cloud Hardware Market Could Be A Serious Tailwind For Cisco Stock

  • Cisco is best known as a networking company, not a computer vendor, but that needs to change.
  • The company has attained a big foothold in cloud data centers.
  • The position gives it huge opportunities in the Internet core.

Cisco (NASDAQ:CSCO) is best known as a networking equipment supplier, mainly to carriers like AT&T (NYSE:T).

But in the last few years, it has become much more than that. With its "hyperconverged" HyperFlex racks, which combine networking with processing and storage for data centers, Cisco has become a major player in cloud infrastructure.

According to Synergy Research Group, Cisco in the fourth quarter had about 12% of the cloud hardware market, tying it for market leadership with the company now called Hewlett Packard Enterprises (NYSE:HPE).  This is currently a U.S. market -- 50% of cloud servers were installed in the United States during the last quarter, according to Synergy -- but Cisco has excellent prospects for extending its lead into global markets, where it has long had extensive marketing presence for its networking gear.

Analysts who have looked at the figures are divided over what this means. Some assume that data center buyers interested in building their own clouds are taking “best of breed” solutions – switches from Cisco, servers from HP, software from Microsoft – and that the market is status quo.

But this is not how the vendors are treating it. Cisco, HP, and Dell are each delivering full solutions, including storage, and offering to be “one throat to choke” on the resulting solution. If Cisco is indeed getting 12-13% of a $60 billion market growing at 20%/year, as the Synergy research suggests, that’s about $7 billion for 2015, another $8 billion in 2016, and possibly $10 billion in 2017. For a company that did $49 billion in business in 2015, that’s a serious tailwind, especially since revenues are up only $3 billion/year since 2012.

Asked about the figures, Synergy spokesman John Dinsdale said the current spend is heavily hardware-oriented, with private companies establishing their cloud data centers. That should be followed, in time, with a heavier spend on software and management, especially security software, and this should also be in Cisco’s wheelhouse, given its recent acquisitions of ThreatGRID, OpenDNS, and Lancope, and its adoption of a “security everywhere” strategy that places security sensors throughout a network, accelerating incident response.

As Cisco has accelerated its cloud hardware and software development, its margins have also moved up, with net income crossing 25% of revenue for the first time in years during the most recent quarter. It all indicates that new CEO Chuck Robbins and his team may finally have a handle on this cloud thing, and are poised for several highly profitable years ahead, as big enterprises adapt to the new cloud era.

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