Cisco Systems, Inc. (NASDAQ:CSCO) has transitioned from a cutting-edge networking company during the dotcom era to a legacy hardware giant in the past two decades.
That kind of transition brings both curses and blessings.
On the curses side, its sheer size has meant it isn’t as nimble as it once was, and given how important networking has become to the entire telecom ecosystem, it has also brought along a significant amount of competition that want to be the next Cisco.
Also, times have changed and it can be difficult to move a ship as big as CSCO into the newest sectors, especially since it predominantly builds hardware and big changes to hardware is usually an evolutionary process for a company with a $170 billion market cap.
On the other hand, CSCO dominates the server space, so a large amount of companies rely on CSCO technology to power their operations. And because they’re also large organizations, legacy systems are not too much of a concern since they have no interest in totally revamping their systems overnight.
But the one thing every company is interested in is money — ways to save money and ways to make more money. And we’re at one of those points of inflection where cloud computing and mobile computing are becoming the next dotcom revolution.
This means that Cisco’s customers are looking for options to get into the cloud, which is a more software-focused effort rather than a hardware-focused one.
This has been the challenge CSCO has been facing in recent years — how to add value to its legacy systems before the newer generation of Software as a Service (SaaS) firms and cloud-focused companies start grabbing market share.
Fortunately, CSCO has a well-established moat around its big clients. The newer firms like Arista Networks Inc (NYSE:ANET) and VMware, Inc. (NYSE:VMW) are gaining traction in the cloud storage space, but still aren’t getting close to eating Cisco’s lunch.
While the competition is a concern, the encouraging news for CSCO is that because of its size, it has the wherewithal to buy what it needs, if it can’t produce it. And it has begun to do just that.
Instead of building out a cloud business, it is going out and buying leading firms in this new growth sector. Just this week, it announced that it has purchased BroadSoft Inc (NASDAQ:BSFT), a cloud services telecom firm, for $1.7 billion. Last week it announced it bought Perspica, an application analysis firm.
Both these moves show that CSCO understands the challenges it is facing and is making the moves to stay ahead of the curve.
CSCO stock is up a respectable 14% year to date and when you add on the 3.4% dividend, it continues to deliver, even as the Street is still in the thrall of the smaller cloud-focused companies. But CSCO stock is now in the pantheon of blue chips, and with its smart acquisitions should be there as we enter the next stage of the digital age.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
