Cisco (NASDAQ:CSCO) is a massive company that's struggling to find growth, as many smaller competitors have quietly moved in on major segments to steal market share. One of those important segments involves routers, both core and edge routers, with two companies in particular being Alcatel-Lucent (NYSE:ALU) and Juniper (NYSE:JNPR).
Fundamental declines and missed opportunities
In Cisco's most recent quarter, total sales fell 7.4% year-over-year to $11.2 billion. While Cisco's total business revolves around communications and networking, one of its core segments is routing, which includes the delivery of content and various types of service.
In particular, Cisco has really dropped the ball when it comes to its routing business, which made up 21% of product revenue in the last quarter, as sales fell 11% year-over-year. Yet, for the most part, this is a segment within the market that is recovering from a cyclical slowdown, a segment where Cisco should achieve growth, but has been unable.
Large, diversified, and capitalizing on routers
Alcatel-Lucent is a large and direct competitor of Cisco, generating nearly $19 billion in revenue during the last 12 months. Also, in the last year, Alcatel's share price has soared 180% amid restructuring plans to dispose of unprofitable segments and focus instead on those that have been growing, such as the company's router business.
For Alcatel, routers are coupled in its core networking segment, a unit that accounted for more than 43% of total sales last quarter. Specifically, its routing division is one-third of the core networking segment, and in 2013 it grew 10.3% over 2012, marking the company's third year of double-digit growth.
Alcatel has managed to produce this growth by partnering with large telecom companies like AT&T, China Mobile, and Sprint to expand their 4G LTE networks into less populated areas and improve their networks in highly populated regions. Given the strong increase in data usage both in the U.S. and globally, this market could fuel double-digit growth for many years to come.
Smaller, but growing with ease
Juniper has soared 25% already this year, and the company is a Wall Street favorite in this space because nearly half of its total sales come from routers. During the fourth quarter, Juniper's router revenue grew 17% year-over-year, which far exceeds the company's 12.3% total growth in the quarter.
Juniper is much smaller than Alcatel-Lucent and Cisco, with annual sales less than $5 billion, but it has one of the most refreshed lines of routers in the industry, giving the company a natural advantage with top technology. As a result, Juniper supports a P/E ratio of 32, and is quite profitable with operating margins of nearly 13%.
While Juniper may appear a bit pricey, its growth and opportunity to expand globally are impressive. As a result, investors are willing to bet on long-term sustainability, as Juniper continues to demonstrate reasons for optimism.
No excuses, better opportunities
There are no reasons for Cisco to be trailing so far behind in the router industry with double-digit year-over-year declines. This is a growing industry where Cisco has an enormous presence, yet the fact that its peers are growing, and it is not, is often overlooked by investors simply because of the company's name recognition and history of consistency.
However, despite Cisco's underperforming stock and three consecutive quarters of disappointing fundamentals, Alcatel-Lucent -- a company that has soared in the last year -- likely presents a better investment opportunity. Not only is Alcatel growing and improving its core businesses, but at 0.5 times sales, with margins still improving, it's many times cheaper than Cisco at 2.5 times sales and margins that are under pressure.
Essentially, Cisco is moving in the wrong direction in a very important segment. Instead of investing in Cisco for its total package, investors might be better served by selecting segments of the company's business that are strongest and finding competing companies that are performing better. In this case, those companies are Juniper and Alcatel-Lucent, from a both a growth and value perspective, as both represent a significantly better investment option.
Brian Nichols owns Alcatel-Lucent. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.