Cisco Systems (CSCO -0.50%) is still the king of the networking market. It sells more routers and switches than any other company.
For a company that's the most-tenured market leader, though, it's strangely struggling. Smaller competitors are slowly chipping away at its share of the ethernet switch market; it's not exactly crushing its router competition, either. If you're specifically looking for growth from this often-overlooked technology area, there's a better bet: Arista Networks (ANET -0.02%).
Cisco's sheer size makes it tough to keep growing
While losing market share is a legitimate concern, gaining market share doesn't inherently translate into profit growth. Plenty of companies are booking ever-bigger losses as their revenue improves. In the well-established networking market, though, shifting market share means something.
Numbers from IDC show that in the first quarter of 2019, Cisco controlled 53.7% of the ethernet switch market. Last quarter's market share came in at only 46%, extending a long-term downtrend. But over that same span, Arista's switch market share has grown from 7.5% to 11.4%.
Hewlett Packard Enterprise (HPE 1.18%) is gaining ground on this front, too, growing its share to 7% as of last quarter. Huawei's share slipped last quarter, but it's certainly not been losing share since 2019.
Data source: IDC. Chart by author.
Cisco's waning share of the switch and router market has coincided with slowing operating income and stagnant net income.
CSCO operating income (TTM); data by YCharts. TTM = trailing 12 months.
And as Arista is gaining switch-market share, it's also growing its top and bottom lines.
ANET operating income (TTM); data by YCharts.
To its credit, Cisco is faring a bit better with enterprise routers and related services. It accounted for 37.9% of last quarter's worldwide router revenue, keeping Huawei in check with its 23.6% take. Even so, Cisco isn't gaining any share in the enterprise router market.
Data source: IDC. Chart by author.
The market for enterprise routers and related services is roughly half the size of the ethernet switch market. If Cisco is going to do well in one or the other, it would ideally be defending its piece of the networking market.
Define your goal first, then choose
If you currently own Cisco Systems, there's still a bullish case to be made for the stock. If you're a fan of reliable dividends, Cisco delivers. The yield of 3.1% is better than average (particularly among tech stocks), and the company has not failed to make a quarterly payment since 2011.
It has also raised its full-year payout every year since then, even if much of that dividend growth (and underlying earnings growth) is the result of stock buybacks. There are about 20% fewer outstanding shares now than there were back in 2011.
CSCO normalized diluted EPS (quarterly); data by YCharts.
Given its status as a cash cow, this form of ongoing value creation isn't likely to slow down anytime soon.
The tough part about already being a market leader, however, is the difficulty of adding market share that also adds net earnings. Smaller and nimbler companies can maneuver more easily to win share from a bigger competitor, and that's what Arista is doing. Even HP Enterprise is doing so, despite not being a pure-play networking business.
Of the three networking names other than Cisco, though, Arista Networks is emerging as the top growth prospect. Analysts are calling for top-line growth of more than 26% this year, and while that growth pace should slow to only 11% next year, that's the sort of revenue increase that Cisco hasn't seen in a long, long time.
And there's good reason to look for continued growth from Arista: The networking market itself is still growing reasonably well despite its age. Spherical Insights predicts the ethernet switch market will swell from 2021's $15.8 billion to $23.2 billion by 2030, an average of 7.1% per year. Meanwhile, Emergen Research expects the router market to grow 8.6% annually for the same time frame. That's plenty of opportunity for Arista to work with.
