You wouldn't know it based on Cisco's (NASDAQ:CSCO) stock performance since the company announced earnings on May 13, but outgoing CEO John Chambers has made certain to point the networking giant in the right direction before making way for new chief Chuck Robbins.
Last quarter's 5% increase in revenue and nearly 12% jump in GAAP earnings per share (including one-time items) didn't exactly light a fire under Cisco stock. But shareholders shouldn't worry. As impressive as Cisco's fiscal third quarter was, better still, it has positioned itself perfectly to take the biggest piece of a very large pie: the Internet of Things, or IoT.
Specific definitions of the IoT vary, but it's essentially the inter-connecting of virtually everything around -- cars, homes, devices, and yes, even cities -- to (hopefully) make our lives more efficient. And as all-encompassing as the IoT is expected to become, smart cities are expected to lead the way.
How big is big?
If recent estimates are even close to accurate, the IoT will make the market for virtually every other device on the planet seem paltry. According to Business Insider, in four years there will be nearly 7 billion shipments of IoT-related devices -- more than double the number of smartphones, tablets, PCs, and wearable device sales combined.
Including cost savings and increased efficiencies, the IoT is expected to add a stunning $1.7 trillion to the global economy by 2019. That presents a huge opportunity, particularly for Cisco, because the government sector is expected to lead the way in generating all that IoT-related revenue. And with each passing quarter, Cisco is increasing its lead in the development of smart cities.
Leading the way
Cisco describes smart cities as understanding, "how the components of IoE [Internet of Everything] -- people, process, data, and things," all integrate, and then, "utilizing information and communications technology (ICT) and the Internet to address urban challenges" that arise as a result of that inter-connectivity. As cities continue to grow, citizens' interactions with everything from traffic lights, tolls, and each other will (ostensibly) become more efficient thanks to the IoT.
A recent example is last quarter's new smart city solution called "Connected Roadways", which links "disparate transportation systems to increase safety, reduce roadside incidents, improve traffic flow and provide a centralized view of highway systems in a highly secure manner."
To bring Cisco's vision of smart cities to markets around the globe, it opens "Innovation Centers" as a means of facilitating partnerships with both cities and developers to enhance its suite of solutions. Last quarter Cisco announced that Australia would be home to its eighth IoE Innovation Center.
Though the U.S. has been slow to adopt smart cities, Cisco is continuing to find success internationally, inking deals with the likes of Hamburg and Berlin, Germany, along with Santiago, Chile, to name but a few.
Cisco is also gaining a foothold in the fast-growing data center market, which is another significant opportunity given the huge amounts of data IoT devices will generate. Last quarter, Cisco's data center revenue jumped 21% and boasted a more than $3 billion annual run rate.
Naturally, storing all the data that the IoT accumulates raises security concerns. Cisco has this area covered as well. Thanks to a "record number of licenses" in the third quarter, Cisco's security-related sales increased 14% over the year-ago quarter. And with the advent of the IoT, both data centers and security solutions should continue to expand, driving the 3% to 6% annual revenue growth over the next three to five years that Chambers forecast at Cisco's recent analyst day.
Not surprisingly, a projected $1.7 trillion market impact in the next four years will breed competition, and Cisco has IoT competitors in the world of smart cities, including IBM and Google. That's to be expected.
And like Cisco, making cities more efficient, improving transportation, and reducing energy usage are some of Google's and IBM's smart city objectives. However, Cisco is already implementing those solutions in several of the world's largest cities. Based on its recent quarterly announcement of new "wins," its market-leading pace doesn't appear to be slowing down anytime soon.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Google (A shares), and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.