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Due to poor enterprise spending, 2012 was not a great year for network companies. With industry experts anticipating a rebound IT expenditures this year, here are two companies to consider that are heading in opposite directions – one stock to buy, with a sell recommendation for the other.
The Case for Cisco
Cisco is an absolute buy at current levels. In the company’s ever ending quest to find its competitive edge, Cisco has been spending a considerable amount of cash. Most recently, the company acquired privately held Cariden, a network management software company for an estimated $141 million in cash and incentives. The deal is expected to close in Cisco’s fiscal second-quarter.
This brought the company’s total cloud-based acquisitions to nine in 2012. The company understands that its future relies on these investments. And although its current routing and switching market share remains significant, evidence suggests that hardware solutions will fade out.
Cisco recognizes that companies will look to migrate towards software-based network solutions. To that end, the cloud has serve as Cisco’s major focus. This seems to make sense as that market is expect to triple over the next three years – growing to $177 billion.
Likewise, although Cisco is often criticized for its M&A aggressiveness, I think the company deserves the benefit of the doubt for these moves. Cisco is sitting on $45 billion in cash. And investors should be encouraged by the company’s willingness to grow in areas where corporate enterprises are clearly heading.
Also, with a strong balance sheet, respectable yield and very limited downside risk, Cisco will prove to be one of 2013’s top stories. At minimum, $25 seems a fair valuation for the stock. But, $30 remains a realistic target based on cash flow sales trends, which includes 22% aggregate growth in services.
Is There Hope for Dell?
With another disappointing quarter under its belt, it’s hard to love beleaguered tech giant Dell. The company has had a hard time finding ways to offset an eroding PC business. And it doesn’t appear as if things are getting better. In the most recent quarter revenues declined 11% to $13.7 billion. Profitability continues to be a challenge – eroding 47% year-over-year to 27 cents per share.
It is clear that the company continues to experience margin pressure as gross margins shed 1 point from last year, while also declining by roughly 60 basis points sequentially. Despite these lackluster results, the company’s cash position remains decent with cash flow from operations coming in at $1.3 billion – helping the company end the quarter with $14.2 billion in cash and other investments.
If there is one bright spot in Dell’s business is that servers and networking segment continue to grow at a rate of 11% and 5% respectively. But this is not enough to compensate for the company’s lack of a mobile strategy. But Dell is looking to expand its service offering as evident by some recent acquisitions such as Quest and SonicWall.
Although I’m willing to applaud the company for using its cash to remain relevant, I worry that the company is trying too much to enter a space already dominated by the likes of IBM, NetApp and EMC. Too, it doesn’t help that rival Cisco recently reported an excellent quarter, which also followed guidance that the street approved. While the shares look grossly undervalued at these levels, I’m beginning to wonder that it just might be time for investors to cut their losses and move on.
Bottom Line
Although there are other names in the network sector such as Hewlett-Packard that may deserve a long look in the basis of "how worse can things get, Dell and Cisco presents the contrast that exist in terms of performance. Likewise, rivals such as Juniper may begin to experience margin pressure as upstarts such as Aruba Networks and Palo Alto Networks continue to show impressive growth. Nonetheless, this year there will be plenty of opportunities to steal market share and Cisco remains the standard above everyone else.
