Cisco Systems, Inc. CSCO is the largest player in the networking space, an industry which is currently among the top 3% of our 260-plus industries. This Zacks Industry Rank reflects improving earnings prospects and investors’ trust.
Cisco’s Mixed Prospects
Despite intensifying competition from several smaller players, Cisco carries Zacks Rank #3 (Hold) and remains strong in its domain.
We believe Cisco’s strategy of diversifying its business by introducing software-based networking tools and security services, and relying less on specialized routers and switching equipment worked in its favor.
Also, Cisco has entered into a number of strategic alliances with companies like Accenture Ltd, AT&T T, EMC, Fujitsu, Intel INTC, Microsoft Corp. MSFT, Wipro Limited and MapR. These collaborations have increased access to new technology, helped product development, and facilitated joint sales and marketing programs and the creation of new markets.
The recently acquired cloud-based security provider, OpenDNS, will help the company enhance its cloud security offerings through increased visibility and threat awareness offered by its cloud delivery platform. The company’s partnerships with Apple, Inspur and Ericsson should also support growth.
It’s also not completely clear whether Cisco’s answer to software defined networking (SDN) will help it protect its market share. SDN is basically using commodity hardware with specialized software, so hardware costs can be saved. Since Cisco is the largest vendor of high end hardware (switches, routers), the technology is disrupting its legacy business.
In order to counter the threat of SDN, Cisco has devised a strategy of its own, which it is referring to as Application Centric Infrastructure (ACI). ACI is a comprehensive approach that ties together physical and virtual compute, network and storage by leveraging centralized policies and orchestration. ACI is made up of new hardware in the Nexus 9000 portfolio and software in the shape of an updated NX-OS operating system along with the Application Policy Infrastructure Controller (APIC), which is the centralized point for managing, monitoring and programming the ACI.
The solution streamlines operational processes and reduces operating expenses for power, cooling and cabling. This reduces the total cost of ownership by 75% when compared with software-only network virtualization. The technology ensures the infrastructure is focused on the application. Its Nexus 9000 Series switches deliver high scalability, performance and energy in a compact form factor and are ideal for data center aggregation and access-layer deployments in enterprise, service provider and cloud networks.
It is quite encouraging to see that Cisco’s ACI technology is gaining significant traction with customers. This is evident from the steady growth in the number of ACI customers over the past few quarters. The Nexus 3K and 9K lines grew a combined 350% from the year-ago quarter with total customers growing from 580 a couple of quarters ago to 1,700 in the last quarter. Customers for the APIC line touched 300.
However, one cannot really ignore the company’s soft guidance for the second quarter that takes into account unfavorable exchange rates across the Asia-Pacific region and weak spending environment in China.
What makes it more of a gamble is the weakness in a few emerging markets and slower growth across various product categories that could impact profitability in the near term.
Going Beyond Cisco
Cisco is undoubtedly the most well known player in the industry. But that doesn’t mean its mixed prospects should deter you from investing in this attractive industry.
So given the bright prospects of the Computer Network’s Industry, we have picked 3 stocks which you should buy right now.
These stocks have a favorable Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) and promising value metrics (Value Score = ’A’ or ‘B’) using our new style score system. The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with a Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best of both worlds.
Netgear Inc. NTGR
Netgear designs technologically advanced, branded networking products that address the specific needs of small business and home users.
Currently sporting a Zacks Rank #1, this company has a Value Style Score A.
Over the last 60 days, the stock witnessed positive estimate revisions, which led the Zacks Consensus Estimate to climb 9.9% to its present level of $1.77 a share for the current year. Additionally, the stock gained 22.23% year-to-date.
QLogic Corp. QLGC
QLogic simplifies the process of networking storage for OEMs, resellers and system integrators with the only end-to-end infrastructure in the industry, including award-winning controller chips, host bus adapters, network switches and management software to move data from storage devices through the fabric to the server.
Currently holding a Zacks Rank #2 and a Value Style Score B, its stock has been witnessing positive estimate revisions.
Over the last 60 days, the Zacks Consensus Estimate has climbed 34% to its present level of 67 cents a share for the current year.
Ixia XXIA
Ixia is a leading provider of performance test systems for IP-based infrastructure and services. Its highly scalable solutions generate, capture, characterize and emulate network and application traffic, establishing definitive performance and conformance metrics of network devices or systems under test.
Currently holding a Zacks Rank #2 and a Value Style Score B, the company has been witnessing positive estimate revisions.
Over the past 60 days, the Zacks Consensus Estimate moved 4.5% north to 46 cents a share for the current year. Further, the stock has risen 13.33% year-to-date.
Conclusion
We've all heard the old adage that 50% of a stock's price movement can be attributed to the group it's in.
In fact, studies have shown that an average stock in a strong industry is likely to outperform a great stock in a poor industry.
While this does not mean that you can simply pick any stock in a top group and expect to make money, you will surely tilt the balance in your favor on the very next trade with our top 3 picks.
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