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.

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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.

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