When Cisco Systems (Nasdaq: CSCO ) introduced its first Unix server systems, I called it a terrible example of diworsification. A company long accustomed to relying on server-building giants IBM (NYSE: IBM ) and Hewlett-Packard (NYSE: HPQ ) for a large share of its core networking business suddenly turned into a rival, not a valued partner. That had to be a bad idea.
Sure enough, those cozy ties started to snap before you could say "integrated cloud servers." IBM turned to a handful of smaller networking vendors. HP went to the next level by buying 3Com and removing all traces of Cisco hardware from its own data centers. All the warm-and-fuzzies that used to flow between these guys are long forgotten. Meanwhile, archrival Juniper Networks (NYSE: JNPR ) jumped all over the window of opportunity and now provides a significant part of IBM's networking needs.
No way back
Well, there's no turning back on that decision now. Cisco shares have underperformed most of their big-tech peers since that fateful decision with the notable exception of a rudderless, scandal-tinged HP. The damage is done; maybe it's time for the UCS server gambit to pay off at long last.
In the just-reported second quarter, CEO John Chambers described his servers as "a $1 billion product line that grew over 91% this quarter." So the baby is growing up. At this run rate, and particularly with that kind of hypergrowth, Cisco is more than just a nuisance for the established server players.
Sure, Big Blue and HP each sold about $3.8 billion worth of servers in the third quarter of 2011 alone, reducing Cisco to an invisible speck in the "other vendors" column of Gartner's market report. But unless the product line runs out of steam in a truly spectacular fashion, that'll change soon enough.
The Foolish way forward
Chambers is one of the smartest business leaders I know, and it's always hard to bet against him. I think the fallout from the server idea has taken its toll already, and that story is about to turn positive. It's a shame for shareholders who were left with underperforming stubs for three years as Big Blue and Oracle (Nasdaq: ORCL ) crushed the market while following fairly similar strategies: Roll everything you need for the data center into one branded package, shake and bake, and reap the synergies.
Enough is enough. The risk/reward equation in Cisco is finally making sense here. Realistically, I missed about a 25% run-up in the share price while looking for evidence, but I'd rather be sure I'm right before placing any bets than simply stumbling over a lucky lottery ticket.
For now, I'm getting started with a thumbs-up CAPScall on Cisco Systems. Cisco is a pretty low-risk vehicle for playing both the big data boom and the cloud-computing explosion, and the UCS systems actually make sense in that light. The next time I have spare capital sitting around, I might even pour some real money into this stock. Stay tuned.