2 Reasons Why Cisco Is Stronger Than You May Think

2 Reasons Why Cisco Is Stronger Than You May Think

With shares of Cisco slumping due to weak guidance and pessimism surrounding the company's future, now is the perfect time to buy Cisco. The stock is inexpensive and the threats are overblown, and the recent analyst conference hosted by the company provides two key points which bolster this argument.

The customer is king
With all of the news that big web companies like Google and Facebook are dumping Cisco and instead buying networking hardware straight from Asia, it's easy to forget that Cisco has a broad customer base which is generally very happy with the relationship.

According to a survey done by ZK research, in October of 2013, 92% of networking customers were not considering changing network hardware vendors in the next year, up from 88% in 2012. Given that Cisco holds a dominant market share in many of its core businesses, this means that most current customers are not considering abandoning Cisco.

Along with this, a study done by Morgan Stanley shows that Cisco is the only major network equipment vendor to see customers consistently increasing their spending plans over the past year. As if October, 35% of Cisco customers planned to increase year-over-year spending by more than 10%, with another 30% of customers planning to increase spending by between 5%-10%.

It's clear that a few large web companies ditching Cisco is not the end of the world, as the rest of the company's customers are staying put -- and, in fact, spending more.

The cloud isn't so great after all
One of the big fears regarding Cisco is how the shift to the cloud will affect the company. Organizations are increasingly moving infrastructure to the cloud, and since the large cloud companies are starting to create custom networking solutions without Cisco, demand for proprietary networking products should logically decline going forward.

However, it's not quite that simple. There seems to be this idea that switching from dedicated servers to a public cloud, like those offered by Amazon or Rackspace , is universally less expensive, but it turns out that's just not true. In Cisco's presentation, it cites an article on Gigaom that analyzes the costs of running dedicated hardware versus various cloud solutions. The results are somewhat shocking.

The scenario considered in the article was a fairly powerful server requiring 30GB of RAM and an SSD for fast disk performance, a typical setup for a database server. While a server like this from Dell or HP would cost around $4,000, the annual cost of a dedicated instance on Rackspace's cloud is a staggering $47,654.40. Amazon is less expensive, coming in at $24,492.28, but is still far above the one-time purchase price of the server.

Both co-location, where the server is bought but located and managed elsewhere, and buying and running the server directly, are far less expensive options, even factoring in electricity and maintenance costs. It's clear that the cloud is not a good option if the workload is continuous and needs a lot of resources. The cloud is good for buying computing time on demand, where the resource requirements aren't necessarily known ahead of time. In that case, the cloud can act as a backup, providing additional capacity if dedicated servers can't handle the load.

What does this mean for Cisco? In a lot of cases, it makes no sense for companies to completely move to the cloud, meaning that demand for networking hardware is not going to go away. The cloud complements, but does not completely replace, traditional servers, and this fact alone squashes much of the pessimism surrounding Cisco.

This also means that growth going forward for companies like Amazon and Rackspace may not be as explosive as people assume.

The bottom line
Cisco is a classic example of short-term news driving a stock price. While big web companies are bypassing Cisco, the rest of its customers are planning to increase spending on networking hardware, leading me to believe that the current period of weakness will be short-lived. The cloud, while certainly disruptive to many industries, won't affect Cisco as much as some are assuming, and Cisco remains a strong company with a strong future.

The future looks very bright for this tech company
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The article 2 Reasons Why Cisco Is Stronger Than You May Think originally appeared on Fool.com.

Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Amazon.com, Cisco Systems, and Rackspace Hosting. The Motley Fool owns shares of Amazon.com. 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.

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Originally published