The technology sector has seen a lot of changes in the past five years, characterized by an era of cloud computing, virtualization, and smartphones. Cloud computing is among the fastest growing segments in the industry. At the moment, networking equipment manufacturers are trying to expand into the cloud and their focus has turned to software from hardware.
Cisco Systems, Inc. (NASDAQ:CSCO), in my opinion, is ideally positioned to capitalize on the changing trends despite stiff competition from Juniper Networks, Inc. (NYSE:JNPR) and Alcatel Lucent SA (ADR) (NYSE:ALU).
Cisco Systems, Inc. (NASDAQ:CSCO) has witnessed some extremely impressive growth figures during the last year — wireless revenue grew 27%, switching declined 2%, routing and data center went up 77%, and collaboration and security went down 5%. All in all, Cisco performed above industry averages, delivering value to its shareholders in an environment of cut backs.
Cisco Systems, Inc. (NASDAQ:CSCO) is expanding and has geographical presence in high growth areas such as the emerging markets and the U.S. Its global investment portfolio is worth $2 billion and the business model is heavily inclined towards acquisitions as the company adjusts the portfolio to the changing market trends. Cisco recently acquired JouleX, a software designed to help companies manage energy usage. Earlier, it acquired a U.K.-based networking company known as Ubiquisys for $310 million. Ubiquisys’ acquisition will help the company manage its mobile data networks well, which is one of the most rapidly growing segments in the sector.
One of the biggest challenges faced by the industry is the prevalence of malware and cyber security threats. Management has high hopes from its recent launch of Cisco Systems, Inc. (NASDAQ:CSCO) Platform Exchange Grid (pxGrid), with its architectural framework to combat security threats. Furthermore, a consistent stream of revenue can be expected from its recent acquisition of Sourcefire, an internet firewall company.
Other stocks to watch out for
Other major players in the networking equipment manufacturing industry are Juniper Networks, Inc. (NYSE:JNPR) and Alcatel Lucent SA (ADR) (NYSE:ALU). Juniper has its operations diversified across wireless, routing, and switching and data center and cable content segments. It competes directly with Cisco Systems, Inc. (NASDAQ:CSCO)on geographical and operational lines. The business heavily invests in product innovation.
Juniper Networks, Inc. (NYSE:JNPR) has undertaken a similar move to capitalize on the security challenges faced by the IT industry. Its strong presence in the Indian market should prove to be a growth driver. The company recently signed a partnership with the Muthoot Group in developing a customized banking application for its customers. Juniper designed its first web intrusion system by the name of Junos WebApp Secure to protect websites from intrusion.
On the other hand, Alcatel Lucent SA (ADR) (NYSE:ALU) has completely redesigned its business model via its “Shift Plan.” Management is planning to re-position its services from a telecommunication generalist to an industrial specialist. IP networking and Ultra-Broadband Access seem to be the core focus of the business. This French giant has evolved its product portfolio through the addition of IP, cloud, and ultra-broadband services. Like its competitors, Alcatel-Lucent is looking to benefit from software-driven growth.
Summary
Cisco Systems, Inc. (NASDAQ:CSCO) is the pick of the bunch in my opinion. The company is capturing the rapidly growing cloud computing segment while the conventional networking equipment segment is growing slowly. Cisco has massive cash flows (over $10 billion in free cash flows in 2012), which will ensure the company is able to make necessary acquisitions. Furthermore, there is the prospect of attractive dividend. Solid cash flows and growth opportunities make it one of the best dividend stocks in the market.
On the other hand, Juniper Networks, Inc. (NYSE:JNPR) is also making some serious forays in the cloud computing segment. In addition, its presence in emerging markets should augment future growth and we should see significant price appreciation over the next two years.
Alcatel Lucent SA (ADR) (NYSE:ALU) is probably the riskiest pick in the bunch. The company has been facing a lot of internal issues with slowing global demand for networking equipment. However, there has been substantial improvement in the stock price and the stock has gone up more than 100% in the past twelve months. If management is able to execute its strategies well, then Alcatel-Lucent might prove to be an attractive investment. However, investors should be patient with Alcatel-Lucent and only risk savvy investors should choose it, in my opinion.
The article Cisco Is the Best Pick in the Networking Sector originally appeared on Fool.com and is written by Ishtiaq Ahmed.
Ishtiaq Ahmed has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems (NASDAQ:CSCO). Ishtiaq is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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