Shares of Cisco (CSCO - Free Report) declined 4% to close at $41.78, on Jul 13, following rumors that Amazon Web Services (“AWS”) intends to market network switches to business customers.
However, we believe the fears are overblown considering Cisco’s dominant market share, domain expertise and expanding clientele.
Per a report, Amazon’s aggressive pricing strategy will not only position it well to foray into the market but also aid it in gaining competitive edge over the companies in the space, including Cisco, Arista Networks (ANET - Free Report) , Juniper (JNPR - Free Report) , among others. Specifically, the report highlights that one of the two people “who has been briefed about the project” estimated that Amazon could price white-box switches around 70-80% lesser than Cisco.
Amazon and Cisco both refrained from making any comments on the issue. Even Arista and Juniper kept quiet regarding the rumored development.
The proposal, if it materializes, will position AWS as the foremost cloud company to sell commercial white-box switches to the enterprise market. White-box switches combined with open-source software provide a customized edge over other traditional networking hardware providers. The move will enable AWS customers to run data centers by deploying fewer network engineers, consequently, reducing costs.
Notably, the company has returned 36.9% in the past year outperforming the industry’s rally of 34.5%. The outperformance can primarily be attributed to its expanding footprint in the rapidly growing security market among other initiatives in emerging technologies.
Amazon’s Strategy to Offer Hybrid Cloud Solutions
The proposal, if it materializes will place AWS to be the first foremost cloud company to sell commercial white-box switches to the enterprise market. White-box switches combined with open-source software provide a customized edge over other traditional networking hardware providers. The move will enable AWS customers to run data centers by deploying fewer network engineers, consequently, reducing costs.
We note that Amazon has been using white-box switches in its own data centers. Per the report, “the person with direct knowledge of the project” affirmed that AWS is projected to introduce the networking switches to business customers within the next 18 months.
Additionally, a few white-box manufacturers, including the likes of Delta Networks, Edgecore Networks and Celestica are aiding AWS in this regard.
Should Cisco Investors Worry?
The company’s Infrastructure Platforms comprise Switching, NGN routing, Wireless and Data Center solutions, which accounted 57.5% of total third-quarter fiscal 2018 revenues. Revenues inched up 2% from the year-ago quarter to $7.16 billion.
The year-over-year increase can primarily be attributed to robust growth across switching, wireless and data center business. Moreover, increase in switching revenues has witnessed strong growth across both campus and data center.
Further, per IDC estimates, Cisco dominates the global Ethernet switch market. The company had a market share of 53.4%inthe first quarter of calendar 2018, registering a 7.6% year-over-year growthin ethernet switching revenues.
The other players in the report comprising Huawei, Hewlett Packard Enterprise, Arista Networks, and Juniper have a market share of 8.1%, 6.0%, 6.5%, and 3.7%, respectively. The fact that the closest contenders in the space have a combined market share of less than 25%, asserts that Cisco’s switching business holds promise. Consequently, the investors should not panic regarding the company’s future in this space
AWS’ move to come up with its own networking switches remains a concern. The new switches are likely to disturb the pricing parameter. Cisco as a result might be hurt by reduced margins.
However, given the scale of its operations in the space, Cisco seems to be a strong contender. The investors must not give up on the company following this announcement. Moreover, Cisco has a diversified portfolio. Strength witnessed in company’s Security and Applications segments are expected to boost top-line, going ahead.
The broad portfolio and expanding customer base add to the resilience of Cisco’s business model.
Zacks Rank & Key Pick
Cisco carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Micron (MU - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The projected long-term earnings growth rate for Micron is 8.2%.
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