On Wednesday, Cisco (NASDAQ:CSCO) reported that second-quarter earnings soared 44% year-over-year despite challenging economic headwinds.
Those strong results weren’t an accident either; they were the direct result of aggressive cost-cutting measures over the past two years, a refocus on government and enterprise operations and strategic acquisitions in growth areas like cloud computing and wireless networking.
And despite the sluggish economy — particularly in Europe — market analysts believe 2013 will witness stronger spending by telecom operators on network gear. Gartner recently predicted sales would rise over 2% in 2013 after falling nearly 7% last year, for example.
At the same time, the network equipment market is rebounding slowly as it morphs to support the “Internet of Everything,” so Cisco knows better than to rest on a little good news. The technology paradigm is changing from a hardware or device-focused business toward the cloud or wireless-enabled delivery of high-value applications and services.
That shift is the main challenge for network equipment vendors like CSCO: Its traditional dominance of the communications business doesn’t necessarily give it an advantage in the cutthroat market for sophisticated software-defined IT services and applications.
So while I wouldn’t bet against Cisco, I also wouldn’t look past its competitors. With that in mind, here are two to play and two to pass on in the network gear sector for now:
Juniper Networks (NYSE:JNPR): Juniper has also been restructuring and cutting costs — an effort that helped improve margins sequentially and year-over-year. JNPR is embracing a software-defined network strategy and the fact that it’s much smaller (its $11 billion market cap is one-tenth the size of CSCO’s) could give it an edge in the transition away from expensive hardware. With a PEG ratio of 1.23 and a forward P/E of over 16, JNPR is a bit pricier than I’d like. But still, the company is agile and well-positioned to reward investors when the telecom carrier market starts spending big again, which could be in the second half of the year.
Oracle (NASDAQ:ORCL): Larry Ellison’s software giant seems out of place in a discussion of network hardware vendors … but that’s exactly the point: Networking competition is heating up. ORCL’s acquisition of network hardware vendor Acme Packet (NASDAQ:APKT) for $1.9 billion this month gives it instant street cred with the largest enterprise and government clients … and with a monster market cap of $165 billion, ORCL has the size to take the battle to its rivals. Plus, its PEG ratio of 1.08 and forward P/E of about 12 are in line with the industry. This is a stock to keep in mind for the second half of the year once the dust has settled from the deal.
Alcatel Lucent (NYSE:ALU): Despite multiple turnaround attempts by Chairman Philippe Camus and outgoing CEO Ben Verwaayen, Alcatel Lucent’s fortunes have fallen precipitously. Although the Paris-based company’s exposure to Europe is a factor, the company is also behind the curve in its fiber optic and 4G wireless offerings, which could limit its ability to cash in on rebounding network gear sales.
Hewlett Packard (NYSE:HPQ): HPQ’s identity crisis continues and I’m far from sold on the idea that it can bring a viable competitive threat to the networking gear table anytime soon. The former CSCO partner acquired switch vendor 3Com back in 2010 to bring more heat in that market segment, but it hasn’t been able to displace Cisco’s incumbent position so far. And CSCO has upped the ante in the fight for HP’s enterprise business with deployment of the Unified Computing System (UCS) platform — a virtualized data center alternative that allows enterprises to do more with less. With CEO Meg Whitman still enchanted with consumer products like Android-based tablets and smartphones, I’m not sure HPQ is ready to defend its data center turf.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.