Will Money Rain From the Skies?

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

As I read the latest news about networking giant Cisco’s (NASDAQ: CSCO) acquisition of Meraki Inc., the question that popped in my mind was: will the company’s latest acquisition, that’s part of a larger move to gain an early start in the realm of cloud computing, really be a game changer? After all, rival Dell’s (NASDAQ: DELL) stream of similar acquisitions did not do much to boost the company’s prospects when earnings season struck.

If you look at it independently, the Meraki move is a clever one indeed. With Cisco CEO John Chambers being only too aware that the PC era has given way to the reign of smartphones and tablets, Meraki’s expertise with Wi-Fi networking and enterprise security should give Cisco the required edge over the competition. But what’s far more lucrative is the way the deal would boost Cisco’s customer base by adding mid-sized businesses that Meraki once catered to and that cannot afford expensive on-site equipment.

In fact, Meraki has been the latest addition to a string of short and sweet acquisitions that Cisco has made in recent times, backed by its substantial cash reserve of around $45 billion. And that’s very much needed at the moment, given that the company has had to cut down costs on all fronts, reduce prices and even shut down a few divisions that performed below expectations – all in an effort to boost profit margins amidst an increasingly fierce competition. After all, being a hardware manufacturing biggie simply doesn’t work out in today’s software scenario, where every administrator is looking at cost-cutting measures with an eye on more remote control over networks.  

The fact that Cisco’s first quarter earnings beat Wall Street estimates is itself a commendable fact for a company that has been fighting adversity on multiple fronts for some time now. While Europe continues to be a sore point with sales dipping as much as 10%, Cisco also bore the brunt of reduced government purchases, an important part of company revenue. At the same time, while the company is on the correct path by banking more on the cloud, the way in which the government handles the fiscal cliff will really influence future enterprise buying in the US, and that’s going to be a ‘make or break’ situation for Cisco.    

For the immediate moment, I think potential investors can really take heart from the fact that Cisco is much better placed than some of its closest competitors. For instance, Quest was just one of the long line of cloud-related acquisitions that peer Dell delved into. Adding companies such as Wyse Technology, Make Technology and Clerity Solutions sure didn’t help Dell as the stock price slipped to an all-time low in over three years, prompted by the prediction of a fourth consecutive quarter of slumping sales. But that’s mainly because Dell’s bread-and-butter PC business is fast becoming history. Cisco, on the other hand, is already switching gears. Others such as chip giant Intel (NASDAQ: INTC) are doing no better either, as they are equally hard hit by the decline in pc sales, along with the unstable macro scenario. With its pc group sales going down 8% on a year-on-year basis, Intel is already into the process of changing the target customer segment for its microprocessors.    

For now, Cisco can afford a pat on its back. For the future, it might be a different ball game altogether. And then there’s the fiscal cliff to worry about. I would advise you to buy a little into this stock while keeping an eye open for the future. Fool on!


subhadeeptech has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Dell and Intel. 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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