Cisco Systems, Inc. (NASDAQ:CSCO) reported a fairly strong quarter, with its earnings per share sailing past analyst estimate. The stock rallied by 12.62% in the Thursday trading session because of the strong earnings growth the company was able to report for the quarter.
In its latest quarterly earnings release the company was able to grow its net sales by 5.4% year-over-year with net income growth of 14.5% year-over-year. The growth in net income was driven by the sudden increase in the gross profit margin from 60.70% to 63%. This incremental improvement in gross margin was what led to the sudden increase in net income year-over-year.
The company was able to beat analyst estimates over the past quarter. With analysts on a consensus basis expecting earnings to grow by 7.60% this year, the company’s 14.5% earnings growth was well ahead of analyst estimates.
In its annual report Cisco Systems, Inc. (NASDAQ:CSCO) stated that its data center division grew by 65% year-over-year. The growth in the data-center segment is driven by its server virtualization. Cisco Systems, Inc. (NASDAQ:CSCO) competes with companies like International Business Machines Corp. (NYSE:IBM) and Amazon.com, Inc. (NASDAQ:AMZN) in the cloud space.
Growth potential compared to peers in its space
The cloud is a heavily contested space with companies aggressively competing amongst each other. In its latest earning release International Business Machines Corp. (NYSE:IBM) was unable to meet analyst estimates (International Business Machines Corp. (NYSE:IBM) almost always meets expectations). The company reported a 16% decline in its Systems and Technology Division. The segment’s decline was driven by the continued adoption of virtualized networking solutions that companies like Amazon.com, Inc. (NASDAQ:AMZN) and Cisco Systems, Inc. (NASDAQ:CSCO) are offering.
As a result, International Business Machines Corp. (NYSE:IBM) was unable to meet analysts’ estimates. Any slight miss on earnings will hurt the long-term growth models that analysts have for the company, which is why International Business Machines Corp. (NYSE:IBM)’s stock declined from $215 to $186 per share following its earnings announcement. International Business Machines Corp. (NYSE:IBM)’s systems and technology division are being cannibalized by the cloud.
Investors could look at Amazon.com, Inc. (NASDAQ:AMZN) as being a potential investment alternative. The company was able to grow its net services sales from $1.9 billion to $2.8 billion year-over-year. The company generated a 47.3% rate of growth from its cloud solutions. Amazon.com, Inc. (NASDAQ:AMZN) was also able to grow sales from its online retail unit by 18% year-over-year.