Cisco Systems, Inc. (CSCO) Outgrows International Business Machines Corp. (IBM)

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.

Earnings run-down

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.