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What Makes Cisco's Stock So Attractive

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The global enterprise technology sector has been in somewhat of a rut lately as Europe stagnates, emerging markets slow, and the U.S. government tries to slash spending. 

All this has resulted in relatively slow growth for the world's dominant IT franchises like Cisco Systems  (NASDAQ: CSCO  ) , Oracle  (NYSE: ORCL  ) , and IBM  (NYSE: IBM  )  as companies large and small sit on their idle cash rather than delaying critical investments like IT spending. However, it's not all doom and gloom.

Yesterday, Cisco knocked its most recent quarterly earnings out of the park, rejuvenating investors' hope and driving a huge rally in its share price. However positive the earnings report was, it only explains a fraction of the overall Cisco investment thesis. To better inform investors about three of the most critical areas to watch for Cisco, the Fool has included below a key portion of its new premium research report on the networking giant. We hope you enjoy it!

The opportunity
Roughly 2.3 billion people around the world use the Internet today, according to venture capitalist Mary Meeker. A great number of these people get service thanks to Cisco Systems, the undisputed market leader in data networking equipment.

Meeker's annual Internet Trends report is a must-read for anyone following the innovations popping forth from Silicon Valley. The 2012 edition, given at the annual AllThingsD conference sponsored by The Wall Street Journal, now shows that roughly a third of our world is online. Hundreds of millions more will join them in the decade ahead.

Or at least that's how it would seem when viewed through the lens of history. Internet usage has exploded since the early '90s when a team led by Sir Tim Berners-Lee created a system for interconnecting hypertext-linked documents using the Internet, a visually appealing alternative we now know as the World Wide Web.

In the years since the rise of browsers for accessing HTML documents, traffic on the Internet backbone (i.e., the connections between big data centers where big computers process URL requests) has risen more than 22,000 times — from 150 terabytes a month in 1996 to at least 3.4 million terabytes a month in 2011, according to a University of Minnesota study.

Volume like that equals opportunity. But for Cisco, growing the business isn't just about selling more gear, software, and services to those who own the wires and towers — i.e., the telecoms and cable operators that deliver Internet service. It's also about providing more advanced systems for safely shepherding sophisticated types of traffic. Today's Internet carries much more than email and documents.

We use the Internet as a substitute for airwaves that, for decades, have delivered radio and television signals into millions of homes. We also use it to access software that, in years past, would be too sophisticated and sensitive to be loaded anywhere other than a nearby computer. The result? A jam-packed Information Superhighway that began in the late '60s as a Defense Department project called ARPANET.

Again, look at the data. Monthly Internet traffic grew 36% last year to an average of 27,483 petabytes, enough to fill up more than 28 million 1-terabyte hard drives every 30 days! In 2002, the entire Internet hosted just 405 PB a month. Our planet is 68 times more digital today than it was a decade ago.

The number of people connected to the Internet has helped fuel growth, certainly. But what users do is much more important than how many there are. And on the Internet, users are taking to complex services with surprising speed.

"The network is the computer," as John Gage at Sun Microsystems used to say, and the network – that is, the glorious mess we call the Internet – can't function without sophisticated equipment. More than any other company, Cisco is providing that gear.

The problem with the Internet you know
Demand keeps rising because the Internet isn't static. It is an ever-changing compilation that needs upgrading in the same way the U.S. national bridge and highway system must be cared for. And not just on the national level. On-ramps, streets, byways, and more require local love in order to make sure the system works so well that any one of us could drive from San Diego, Calif. to Fool HQ in Alexandria, Va. without incident.

Think about what you'd need to build a similar infrastructure online, and you'll get a sense for what Cisco does and sells. Principally, you can break it down into two major categories:

  • Routers. Essential to the functioning of the Internet, data traffic flow through routers on their way from one network point to another. Embedded software allows the smartest of these devices to detect and optimize the delivery of mobile, voice, video, and other specialized types of data. Cisco's menu of routing products is sold according to the amount of security, scalability, and transmission speed required.
  • Switches. Like routers, switches sit in between destinations in a local- or wide-area network but with a simpler purpose: to filter and forward data packets to their ultimate destination. Large-scale networks that tap into the Internet tend to use both routers and switches for maximum effectiveness in delivering data.

Looking for more?
This was just a small segment of our new premium research report on Cisco. If you want to get a complete perspective on whether Cisco is a buy or sell at its current levels, the report will shed invaluable light on this IT powerhouse. Not only that, but the report also comes with an update each quarter to keep subscribers fully informed on the timeliest news driving Cisco's share price. To get your copy, just click here now.

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10/21/2016 4:00 PM
CSCO $30.15 Down -0.01 -0.03%
Cisco Systems CAPS Rating: ****