If the cloud and related solutions aren't the next big thing in tech, they're certainly near the top. Regardless of which market estimate investors choose to believe, most everyone agrees the cloud is a more than $100 billion industry, growing fast. As with any skyrocketing opportunity, some of the biggest names in the tech industry -- including Microsoft (MSFT -1.84%) -- have already hedged their futures on securing a cloud market leadership position.
According to some pundits, industry stalwarts, including IBM (IBM -0.89%) and Cisco (CSCO 0.67%), were too late to make the transition to the cloud. While it's true that IBM and Cisco were slower to enter the cloud wars than Microsoft and others, that doesn't mean they're too late to reap the rewards.
Based on IBM's and Cisco's negative stock prices year to date, there seem to be a lot of investors who also believe the cloud train has left them at the station. But what if the naysayers are wrong, and both IBM and Cisco become even better growth and income investment opportunities than they already are?
The return of the dinosaurs
The annual "Structure" cloud computing conference was recently held in San Francisco and included several industry insiders speaking to the challenges and opportunities providers face in the years ahead. Naturally, all of the cloud big boys were in attendance, as were a host of analysts and institutional investors.
Particularly intriguing were some comments made by a venture fund manager as it relates to IBM's and Cisco's cloud efforts. While Microsoft was singled out as one of the early adopters and current leaders in the cloud -- not surprising given its $8.2 billion annual run rate of cloud revenue last quarter -- IBM and Cisco weren't viewed so positively.
In fact, a venture capitalist referred to the two as dinosaurs, citing their reactive moves to enter the cloud race, while also saying that by contrast, Microsoft has been able to make successful pivots over time thanks to its early adoption. Do IBM and Cisco warrant the relatively harsh assessment of their respective cloud efforts? The short answer in IBM's case is a resounding "no," while Cisco's reticence to share cloud revenue specifics makes things a bit fuzzier, but it also appears to be moving the needle.
The case for IBM
Followers of IBM are likely familiar with CEO Ginni Rometty's "strategic imperatives." Unlike IBM's declining legacy hardware business, its strategic imperatives are a collection of solutions developed for growth markets including the cloud, a "connected" world via the Internet of Things (IoT), and cognitive computing, to name a few. And in these regards, led by its cloud results, IBM has made enviable strides.
Last quarter's $4.5 billion annual cloud revenue run rate was nearly 50% higher than the previous year's $3.1 billion, and more than 65% after adjusting for currency. IBM's emphasis on data should continue to drive its cloud sales thanks to another of Rometty's strategic imperatives: business analytics. Hosting an unprecedented amount of data in the cloud is nice, but incorporating the analytics required to develop actionable results is where the real opportunity lies. And in that regard, IBM is ahead of the curve.
The case for Cisco
CEO Chuck Robbins won't share cloud-specific revenue, but it is telling that of Cisco's seven primary divisions, its 24% jump in data center sales last quarter was easily its fastest-growing unit. As enterprises shift to cloud-based, off-premise data centers, Cisco is slowly gaining its share of the market.
Cisco's collaboration and security units also include cloud components, and like data center revenue, both performed admirably last quarter: up 17% and 7%, respectively. Without divulging specifics, Robbins did say that last quarter's revenue was buoyed by cloud sales thanks to Cisco "aggressively driving our cloud business."
IBM and Cisco have lost some early battles, to be sure, but the war for supremacy in the cloud is just getting started. To suggest the two tech titans have missed the boat entirely would be ludicrous, but it does bode well for long-term growth and income investors. Why? Because along with each paying a more than 3% dividend yield, the negativity surrounding IBM's and Cisco's cloud results are part of the reason they're trading at just 9 and 11 times future earnings, respectively.
