CSCO Stock – Buy Cisco to Play the Internet of Things

In mid-April, I recommended buying Cisco Systems, Inc. (NASDAQ:CSCO) at $28 as one of my top picks to capitalize on the major technology trend known as the  “Internet of Things” (IoT).

csco stock cisco logoNow that CSCO stock has been bumped up to a Zacks #1 Rank Strong Buy, I’m still a fan of “the architect” of the worldwide web. Here was the argument in my Zacks Confidential report from April 13:

“Now that Apple Inc. (NASDAQ:AAPL) has launched its first smartwatch, the Apple Watch, the Internet of Things will be getting a lot more press and investors will be busy trying to uncover the opportunities.

“The Apple Watch is not the first wearable smart-device that can connect to the web and other devices, but the Apple Watch will certainly create the most buzz, fostering not only curiosity about the IoT, but also broader acceptance of the mysterious technology and its goal of storing and tracking more of your data and actions.”

However, the IoT is not just about connecting your home, car, appliances, devices and body to each other and to the web, it’s about a revolution in industrial innovation and efficiency that will make the global economy significantly more productive.

Twin Titans of the IoT: CSCO and GE

So, $3 billion is nice, but what about $19 trillion? That massive amount has been tossed about in connection with the IoT ever since Cisco CEO John Chambers first uttered it at the Consumer Electronics Show in January of 2014.

That was his estimate of the cumulative economic impact by 2020 associated with adding intelligence and connectivity to everyday objects and factories, as well as every plane, train, and automobile. Chambers, who prefers to call the trend the Internet of Everything, says, “It will be bigger than anything that’s ever been done in high tech.”

In essence, the technology will become as ubiquitous as microchips are but maybe even more so because it will extend beyond machines and computers. Do your car tires have radio frequency chips to transmit pressure and other data to your console? Tires are now “connected” devices.

But that giant $19 trillion increase in global GDP isn’t just about consumer devices and new products. It’s about giant cost savings for “intelligent” corporations. It’s about businesses harnessing the cloud and big data to teach them how to be more efficient.

A great ongoing example is how General Electric Company (NYSE:GE) has been investing in the technology to gather more data about all the machines they build, from locomotives and jet engines to washers and medical equipment. In October, ZDNet.com reported on GE’s rollout of its Predix software platform to developers and users in 2015 as it aims to add intelligence to industrial gear:

“General Electric on Thursday [October 9, 2014] announced a bevy of alliances with enterprise technology heavyweights as it lines up support for its Predix platform, which is software designed to add intelligence to various Internet of things end points.

“For GE, the Internet of things, which the company calls the industrial Internet, the networking of machines and industrial gear is a growth engine. GE wants to position its turbines, engines and other equipment as smart gear that are connected via its software.

“GE added that it will deliver more than $1 billion in incremental revenue from its roster of 40 industrial Internet services. GE currently monitors and analyzes 50 million data points from 10 million sensors on $1 trillion of managed assets daily.”

How CSCO and GE research, develop and invest for the IoT will say a lot about the business opportunities. Right now, they are diving in big, and that says a lot about the future they see.

Buy CSCO Now

Wim Elfrink, Cisco’s executive vice president for industry solutions recently wrote in a blog:

“Today, 37% of total device connections to the Internet come from industrial applications, and industrial connections will surpass consumer-based connections in 2017. IoT serves as the technology foundation in the continuing technology evolution toward the Internet of Everything (IoE), which is the intelligent networked connection among people, process, data AND things. IoT is an $8 trillion opportunity; IoE promises $19 trillion in global economic value over the next decade if we establish the right building blocks for widespread adoption.”

The potential on the industrial applications for IoT cannot be overstated. Elfrink goes on to talk about their partners:

“Helping to lead the revolution taking place in industrial applications for IoT are Shell, Rio Tinto, Rockwell Automation, Schneider Electric, Intel, Zebra, Freescale, AirWatch and AGT to name just a few of the firms who recognize the business outcomes made possible by this new solution.”

Cisco is a Zacks #2 Rank trading at 14 times forward estimates with a 3% dividend yield. A CSCO that keeps the Internet running will obviously be at the center of the IoT trends and should be able to reinvent itself as needed.

In addition to Cisco being “the obvious pick,” I also recommended investors buy Skyworks Solutions Inc (NASDAQ:SWKS) and Infinera Corp. (NASDAQ:INFN) among “consumer-device plays” for the IoT. You can access the full report here.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.
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