Cisco Systems (CSCO 0.02%) and International Business Machines (IBM 0.10%) faced challenges in recent times despite a storied history as tech icons. There's the coronavirus pandemic, of course. But other factors, such as the technology industry's shift to cloud computing, forced Cisco and IBM to evolve in significant ways.
Both took different paths in this evolution, experiencing success along the way. Compelling reasons exist to invest in each, but is there a clear winner between the two?
Let's evaluate these tech titans to understand why one emerges as the better investment at this time.
Cisco's path forward
As part of its evolution in the era of cloud computing, Cisco built up a suite of software products to reduce reliance on its computer networking hardware business. This proved a prescient move in light of the coronavirus pandemic.
Last year, Cisco contended with supply chain challenges created by the pandemic. This constraint caused year-over-year revenue to drop by 5% in its 2020 fiscal year, which ended July 25. The pandemic could have hurt revenue further if not for Cisco's software business. Its cybersecurity offerings saw fiscal 2020 revenue grow 12% year over year.
Cisco also invested in technology to support a slew of new growth opportunities. These include capabilities for 5G networks, the Internet of Things, and 400G, which involves next-gen technology to address bandwidth demands and other technical challenges related to cloud computing.
These investments are paying off, particularly as the pandemic's end draws closer in the United States. Revenue returned to an upward trajectory in Cisco's fiscal third quarter, ended May 1, increasing 7% year over year to $12.8 billion.
That's just the start of its success. Cisco experienced 10% growth in third-quarter product orders. This was the strongest demand Cisco has seen since the 2012 fiscal year.
Cisco is not only relying on the latest technology trends to power revenue growth. The company moved its software products to a software-as-a-service subscription model, which gives Cisco a reliable recurring revenue stream. Cisco has successfully navigated this transition. Its Q3 subscription revenue comprised 81% of software sales, up from 76% the previous quarter.
The company is also bundling its products. This is a smart move. Any client purchasing networking hardware will also need Cisco's security solutions to protect from criminals hacking that network. Security is essential in the IT industry, so it's no surprise Cisco saw Q3 revenue for its security products increase 13% year over year.
As the pandemic's impact recedes, Cisco sees its business returning to revenue growth. The company expects fourth-quarter revenue to rise at least 6% year over year.
IBM is navigating its own challenges aside from the coronavirus pandemic. Big Blue is in the midst of a multi-year transformation. Its business suffered years of revenue declines as clients moved away from its on-premises technology offerings to cloud computing.
IBM has existed for over a century, so it's well versed in adapting to the technology industry's changes. The company shifted its focus to cloud computing in recent years, and these efforts have proven successful. IBM grew cloud-based income from just 4% of total revenue in 2013 to 34% in 2020.
IBM's cloud efforts led to total cloud revenue of $6.5 billion in the first quarter of this year, a 21% year-over-year increase. Yet some of its legacy businesses weighed on IBM's cloud success.
The company's global technology services segment, which helps clients implement IBM's solutions, saw year-over-year revenue drop 1.5%. This division represents more than a third of IBM's total revenue, bringing in $6.4 billion of Q1's $17.7 billion.
As part of IBM's strategy to focus on its cloud computing and artificial intelligence strengths, it plans to spin off a portion of the operations under its global technology services division into a new company called Kyndryl. Kyndryl will help clients modernize IT infrastructures, serving as a partner to IBM's offerings. The spinoff will happen by the end of this year.
IBM's cloud success is appealing, and once it separates out Kyndryl, Big Blue's cloud business will benefit without Kyndryl's drag on earnings. But the value of owning shares in Kyndryl is murky. That's why I think it's best to wait on IBM shares until the Kyndryl spinoff. That way, you can effectively evaluate whether you want to own a piece of this new company.
Meanwhile, Cisco remains a market leader in its core networking business. Its Q3 results show the company is on an upward trajectory as the pandemic's impact starts to fade. Its investments in up-and-coming trends such as 5G provide years of revenue growth opportunity. These factors make Cisco the better investment right now.