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.
Amazon.com, Inc. (NASDAQ:AMZN) has been aggressively investing in property and equipment in order to expand its distribution capabilities and data-center operations. Amazon.com, Inc. (NASDAQ:AMZN) reported that it increased its spending by 114% year-over-year in property and equipment related purchases. The company’s aggressive growth strategy could reward shareholders over the long-term. Analysts on a consensus basis anticipate the company to grow its earnings by 37.15% on average over the next 5 years.
Conclusion
Cisco Systems, Inc. (NASDAQ:CSCO) seems to be doing better than IBM. The company has been able to better manage its costs while also increasing its revenues. Cisco Systems, Inc. (NASDAQ:CSCO)’s virtualization solution contributed significantly to the company’s revenue growth in its most recent quarter.
Investors who are looking for higher rates of growth may consider Amazon as a potential alternative. However, the valuation could be rich for investors who are looking for value. If value is the investment objective, Cisco could be the better of the two as Cisco has been able to beat analyst expectations by a wide margin. Cisco may be able to sustain higher rates of growth due to opportunities in the cloud, and if that is the case, Cisco could potentially be undervalued.
The article Cisco Outgrows IBM originally appeared on Fool.com.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Cisco Systems. The Motley Fool owns shares of Amazon.com and International Business Machines. Alexander 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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