Hewlett-Packard’s SDN Initiative: Will You Buy It?

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Goldman Sachs‘s hardware analyst Bill Shope has cut the ratings on Hewlett-Packard (NYSE: HPQ) to Sell from Neutral, with a $16 price target, writing that “sentiment has moved ahead of reality” in the Street’s enthusiasm for HP’s turnaround. Estimates may come down and a recovery in earnings power “will be muted through 2014,” he thinks.

In the last few months the stock price of HP has shot up more than 100% from the bottom at $11.35 and profit booking is a strong possibility right now. I would argue any downturn in the stock should be considered as a healthy correction and a decent buying opportunity.

HP Joins The Software-Defined Networking Fray

At the end of 2012 HP revealed that it’s planning to increase the number of its switches that will support the OpenFlow networking protocol: nine new switches will get the support, on top of the 16 OpenFlow-compatible models that are already available from HP. The company also unveiled plans for an SDN controller, which will be sold as both hardware and software.

"If you look at the cloud... it takes a lot of time and a lot of people to provision the network, to bring new users onto the cloud," Bethany Mayer, general manager of HP Networking, said. "Really that amount of time and effort and money just can't remain, it has to change."

Businesses spend a lot of time managing on a device-by-device basis, Mayer said. SDN can change that by allowing flexibility, the ability to rapidly add users to the network, and by lowering operating costs. "We want to spend our time innovating the business instead of just spending time maintaining what we have, and software-defined networking will help you do that," Mayer said.

HP executives outlined their SDN strategy, expecting SDNs will be deployed enterprise-wide in 2015 and represent a $2 billion market in 2016.

“The company is planning to utilize its position as a large player in the market to push SDN,” said Bethany Mayer. VMware (NYSE: VMW) made a splash with its acquisition of Nicira and SDN acquisitions have become common. HP's argument is that their specialties in automating the data center as well as a large footprint of customers make it a leading SDN player.

Who are HP’s Actual Competitors in SDN

SDN effectively involves the virtualisation of networking devices, making the network easier and theoretically cheaper to manage. Using interfaces such as OpenFlow that are based on open standards, SDN supersedes much of the functionality of the firmware embedded in the routers and switches that both Juniper (NYSE: JNPR) and Cisco (NASDAQ: CSCO) make.

Mayer's case revolved around HP's partnerships and focus on open standards. She also noted that HP is a large No. 2 to Cisco and can serve as a counterweight. But I feel Juniper and VMware are well positioned than HP in offering virtual networking solutions, defined by software.

VMware has been very successful in virtualizing legacy apps in enterprise data centers for over 10 years. In 2006, IaaS cloud computing pioneer, Amazon’s AWS, launched EC2 and cloud-era apps found a new home. AWS added new services and lowered prices over the years and now appears to be good enough to attract cloud-era enterprise workloads. VMware needs to "own" these cloud-era workloads to survive, but doesn't have the cloud to do it.

The 175 VMware vCloud partners do not equal AWS, so VMware needs to do the heavy lifting by building their own VMware Hybrid Cloud service. VMware acquisitions DynamicOps and Nicira have positioned the company to orchestrate non-VMware cloud platforms and virtualize enterprise data center networks.

While Mayer is right in classifying Cisco as No. 1, Juniper is fast emerging as a strong player in the SDN game. Juniper acquired software-based networking startup Contrail Systems for $176 million in cash in December 2012. Contrail Systems primarily develops software to update and configure networking equipment instead of manually adjusting networking hardware.

The deal comes within two weeks Cisco bought Cariden, which also operates in the burgeoning SDN market, for $141m. The acquisition is expected to help Juniper to stand its ground against stiff competition from Cisco and VMware.

Conclusion

With SDN, the software era of networking has just begun, and HP is undoubtedly one of leading players in this game. Long-term investors are expected to be benefited significantly by investing in HP.


Anindya Batabyal has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and VMware. The Motley Fool owns shares of VMware. 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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