Cisco (NASDAQ:CSCO) shares have rallied nearly 30% this year, outperforming the S&P 500's 20% gain. That was a surprising run for the 33-year-old networking giant, which is expected to post low single-digit sales and earnings growth this year.

Cisco's forward dividend yield of 3% makes it a decent income play for conservative investors. But for investors looking for a higher-growth play in the crowded networking industry, Ubiquiti Networks (NASDAQ:UBNT) -- which doesn't pay a dividend and is up about 22% this year -- might be a better pick for four simple reasons.

A graphical depiction of wireless connections.

Image source: Getty Images.

1. It's one of the growing WLAN players

Ubiquiti mainly sells wireless local area networking (WLAN) products for service providers and enterprise customers. Unlike bigger WLAN players like Cisco, Ubiquiti focuses on under-served and emerging markets with its UniFi family of access points, switches, gateways, and IP cameras for enterprise customers and its airMAX and EdgeMAX products for service providers.

That niche strategy boosted Ubiquiti's WLAN market share from 4.3% to 5.3% between the third quarters of 2016 and 2017, according to IDC. That makes Ubiquiti one of three major WLAN players -- alongside Cisco and Huawei -- that grew its market share annually.

Those gains came at the expense of laggards like Hewlett-Packard Enterprise's Aruba and Broadcom's Brocade-Ruckus.

2. It will benefit from the smart-home revolution

Zion Market Research estimates that the global smart-home market could grow from $24.1 billion in 2016 to $53.5 billion in 2022. That growth should boost demand for enterprise-class home WiFi solutions.

AmpliFi's home router.

AmpliFi home router. Image source: Ubiquiti Networks.

That's why Ubiquiti introduced AmpliFi, a $312 bundle of two auto-configured mesh antennas and a router that delivers enterprise-class WLAN speeds without "dead zones" to home users. Upon its launch, Gadget Review declared that AmpliFi's mesh networking system delivered "enough performance and range to shatter every speed record we have on the books."

But Ubiquiti fumbled AmpliFi's initial launch earlier this year when a last minute redesign and high shipping costs resulted in a bottom-line miss during the second quarter. But if AmpliFi gains ground with mainstream consumers and Ubiquiti delivers on its promise to expand the line into a family of products, the company could gain a new stream of consumer revenue to complement its core enterprise market.

Cisco offers mesh networking solutions for enterprise customers, but it doesn't offer a mainstream home bundle like AmpliFi yet. Until that happens, Ubiquiti should enjoy an early mover's advantage in the space alongside rivals including Netgear and Belkin's Linksys.

3. Stronger top- and bottom-line growth

Ubiquiti's revenue rose 30% to $865.3 million last year as its net income grew 21% and its diluted EPS climbed 24%. That growth was supported by strong demand for its UniFi, airMAX, and EdgeMAX products. For the current year, Ubiquiti expects its revenue and earnings to rise 18% and 25%, respectively, despite the aforementioned hiccup in its AmpliFi launch.

Those growth figures look much stronger than Cisco's 2% sales decline and 10% earnings drop last year. Revenue from Cisco's switching and routing businesses, which accounted for almost half its top line, respectively dropped 5% and 4% due to the commoditization of both aging markets.

For the current year, analysts expect Cisco's revenue and earnings to respectively rise 1% and 3%, with the growth of its stronger wireless and security businesses offsetting softer demand for routers and switches.

That turnaround is encouraging, but it doesn't fully justify Cisco's rally this year -- which seems partly fueled by income-seeking investors in a low-yield market and excitement about lower corporate tax rates enabling it to repatriate its mountain of overseas cash.

4. Reasonable valuations

Ubiquiti trades at 22 times trailing earnings and 20 times forward earnings, compared to the industry average P/E of 37 for communication equipment providers. Cisco has a trailing P/E of 20 and a forward P/E of 16.

Cisco has lower multiples, but it also has anemic growth and a market cap that is nearly 36 times bigger than Ubiquiti's $5.3 billion valuation. Therefore, Ubiquiti likely has much more room to run than Cisco -- if it plays its cards right.

But mind the pitfalls...

Ubiquiti is an interesting niche player in the networking market, but investors should recognize the risks. Expanding wireless cloud networking platforms, like Cisco's Meraki, could throttle Ubiquiti's growth across the enterprise market.

AmpliFi might fail to find a foothold if the smart-home market flops or mainstream consumers refuse to upgrade their existing home WiFi networks. Therefore, Ubiquiti is much riskier than Cisco, but it could offer much higher rewards over the long term.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ubiquiti Networks. The Motley Fool recommends Broadcom Ltd, Cisco Systems, and Netgear. The Motley Fool has a disclosure policy.