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

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.


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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information