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This Could Be Your Best Large Cap Idea For 2013

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R.W. Baird’s Jayson Noland recently raised his rating on shares of Cisco Systems (NASDAQ: CSCO) to Outperform from Neutral, and raised his price target to $25 from $21, anointing the stock his “best large cap idea for 2013.” Cisco has announced a series of innovations that has the potential to completely change the world of networking.

Cisco’s current share price has been largely driven by the company’s present activities in the area of data center switching and routing. Cisco’s activities in the field of intelligent networking or 3D printing have not yet been discounted in its share price. This article will focus on Cisco’s innovations that can help its share price to rise significantly over the medium to long term.

Cisco’s Data Center Business Remains Robust

The company’s products for data center switching and routing showed the highest scores on VAR (value-added resellers) remarks, followed closely by the company’s “unified compute system” (UCS) servers. Cisco’s family of machines has already amassed nearly 12% of the blade server market and 11,000+ customers. The low-cost competition from Hewlett-Packard (NYSE: HPQ) and others has lost steam. Cisco’s emphasis on SDN (software-defined networking) is likely to prompt a strong push towards Cisco’s one platform solutions.

Cisco Needs a Relevant Public Cloud Position

Cisco needs to develop a relevant public cloud position that integrates networking and computing because of its competition with Hewlett-Packard, F5 Networks (NASDAQ: FFIV) and Alcatel-Lucent (NYSE: ALU). These companies are making big gains on the cloud computing side of networking. While F5 Networks is seeing substantial growth, Hewlett-Packard and Alcatel-Lucent are experiencing modest growth in cloud computing.

Alcatel-Lucent continues to develop its cloud vision, announcing a partnership with Hewlett-Packard that demonstrates its cloud networking play -- Data Center Network Connect and CloudBand. From a business perspective, it's a win for both companies.

Hewlett-Packard, F5 Networks, and Alcatel-Lucent are established players in the networking game. The addition of cloud computing has the potential to make a switch to SDN very easy for these companies. Unlike Cisco, which isn't a prominent player in cloud computing, Hewlett-Packard, F5 Networks, and Alcatel-Lucent can absorb a loss in revenue from networking equipment due to the cloud computing revenue each will receive from the switch.

Cisco Focusing on Innovations for Improving ROE

Cisco’s management is refocusing the business to grow ROE, with disciplined capital return. Cisco’s investors tend to favor ROE expansion to top line growth as Cisco ranked below peers for ROE (return on equity), but in line in terms of sales. Cisco’s ROE currently stands at 16.59%, compared to F5 Networks’ 21.78% and Alcatel-Lucent’s 20.63%. Only Hewlett-Packard has a worse ROE than Cisco. Cisco is trying to improve its ROE by focusing on innovations.

<img src="http://media.ycharts.com/charts/81dc927b8365939b2a720f4f92fdecfd.png" />

CSCO Return on Equity Data by YCharts

Cisco’s Innovations

Intelligent Networking Tools: By 2015, more people will access the Internet from mobile devices than from conventional PCs. A year later, in 2016, 19 billion devices and gizmos will be connected to the mobile Internet -- not just the smartphones and tablets, but from washing machines to cars, almost everything will be connected to the Internet. The revolution is better known as the Internet of Things. It will create a huge problem for wireless carriers, which are already struggling to keep up with surging data demand.

Cisco released a new tool -- the ASR 5500 -- that will let carriers sift through and prioritize the traffic flooding their networks. The ASR 5500 mobile packet core is a kind of gateway between the mobile network and the larger Internet that gives networks the intelligence to handle different traffic differently.

Additive Manufacturing Solutions: What is additive manufacturing? It’s the more formal name for 3D printing. 3D printing will effect big changes in manufacturing delivery models. Sometime soon, we may be able to download a wrench or a new drill just as easily as we download music, books and movies today. We may or may not have 3D printers in our homes, but imagine ordering an object online and picking it up at the local shipping center or post office. It’ll require an amazingly robust and intelligent network. 

3D printing is accomplished by creating micro-thin layers of a product. This means the designs for even a simple product take up a massive amount of digital space. And those designs will be stored and shared over a network. 3D data transportation demands will be so large that 1 Gbps Ethernet will not be sufficient. Manufacturers will need to store, transport and protect the 3D design data that is so large that won’t fit neatly into relational databases.

Solutions like Cisco’s MDS series can provide Storage Area Networking, and the Nexus 7000s and 5000s can transport enormous amounts of data to the 3D printers. Since 3D printing will put a manufacturer’s proprietary designs on the network, the designs will need to be protected. Cisco Secure-X framework provides for perimeter security while Cisco Storage Media Encryption enables security in the data center.

Video Service Platform: Cisco recently announced that it will unveil Videoscape Unity, its new expanded video service delivery platform. The Videoscape Unity will include a multi-screen cloud digital video recorder that will allow customers to restart shows, catch up on past programs, and play back DVR-captured content from anywhere and on any screen. For the first time, video operators will have an open software platform that goes above and beyond "TV Everywhere" services, enabling customers to quicken the delivery of multi-screen video experiences.


Looking at Cisco’s innovative thinking, I can safely say that Cisco could be your best large cap idea for 2013.

Anindya7 has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and F5 Networks. The Motley Fool owns shares of F5 Networks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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