Cisco, IBM Hold the Dow Back; Is the Tech Rally Over?

The Dow Jones Industrials had a relatively quiet day, but tech giants IBM and Cisco held back the benchmark. What's behind their weak performance?

Mar 27, 2014 at 4:30PM
Longview

On Thursday, the Dow Jones Industrials (DJINDICES:^DJI) had a relatively quiet day, with a lack of market-moving news leading the Dow to trade in a relatively narrow range on either side of the unchanged mark. Although the Dow finished the day with a loss of just five points, Cisco Systems (NASDAQ:CSCO) and IBM (NYSE:IBM) played a major role in preventing the Dow from posting decent gains, as both old-tech stocks fell more than 1% to lead the Dow's losing components. These aging tech giants have performed weakly for a couple of years now, and the question many investors are asking is whether there's been a permanent changing of the guard in the technology industry that will prevent Cisco, IBM, and other more mature tech stocks from posting the gains they've seen historically.

What's moving big tech today
Throughout the technology sector, companies have repeatedly embraced the potential of cloud computing to change the prevailing paradigm of the desktop computer. Traditionally, technology users relied on extensive local setups that were largely independent from each other, only interacting when necessary to facilitate communications and exchange of materials and work product. Now, though, tech companies are looking for ways to retain central control over technology assets, offering customers the ability to take advantage of tech resources without having to buy them outright, while retaining the right to obtain recurring revenue from periodic access fees rather than only reaping one-time sales revenue.

Ibm

Source: IBM.

Yet, the challenge that IBM, Cisco, and other well-established players face is that there's a huge cost to moving to the cloud-computing paradigm. Both IBM and Cisco have already faced declining streams of revenue. As asset-management firm AlphaOne Capital's Dan Niles noted in a CNBC interview today, it could prove next to impossible for IBM to reap enough revenue from cloud-related initiatives to make up for the potential loss of sales that could result from customers being able to use cloud resources rather than spending more money on IBM-provided hardware and services.

Cisco's drop today is perhaps in part due to a patent-infringement lawsuit from Spherix alleging $43 billion in related Cisco sales violate Spherix's intellectual-property rights. But Cisco is also dealing with the same revenue challenges as IBM even as it moves to embrace new ideas like its Internet of Things, and spends money on building out a broader cloud network. With its recent announcement spending $1 billion to build out an OpenStack-supported cloud infrastructure with global partners from Australia, India, Europe, and Canada, Cisco is taking on not only IBM, but also a host of other newer-tech companies that have much more of a focus on the cloud.

It's too early to tell whether IBM and Cisco are too mired in their pasts to adapt themselves to a changing technology industry. Historically, IBM, in particular, has done a good job of anticipating evolving trends and adjusted its business before the situation became critical. Now, though, competition is a lot fiercer, and nimbler adversaries don't have the institutional bulk that can hinder strategic changes in companies the size of Cisco and IBM.

It's premature to declare an end to the technology rally, especially given the fact that Cisco and IBM really haven't been part of the upswing in the sector recently. But what's clear is that no matter which way tech goes as a whole, there will definitely be winners and losers, and IBM and Cisco will have to work hard to avoid getting left behind.

Are you ready for the next $14.4 trillion Internet revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play," and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers