Hit by a Spate of Bad News
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cisco (NASDAQ: CSCO) has been hit by a spate of negative news of late like the acquisition of Nicira by VMWare (NYSE: VMW) and the partnership between Juniper and Riverbed Technologies. Further recently, Oracle (NASDAQ: ORCL) announced its entry into the network virtualization industry through its recent acquisition of Xsigo adding to the woes. As the stock position remains volatile following these developments, we rate Cisco as avoid.
VMware's acquisition of Nicira may spell doom:
Recently VMware announced that it has signed a definitive agreement to acquire Nicira, a fast‐growing player in software defined networking (SDN), also known as network virtualization. As Nicira has had minimal revenues to date, we believe that the acquisition was done purely on strategic terms to enable VMware to address a new multibillion dollar market. We believe that the acquisition of Nicira could be called as a game‐changing moment that will speed up customer adoption of SDN architectures. This acquisition will move VMware closer to realizing its vision of a fully virtualized data center spelling a doom for hardware vendors like Cisco. The migration from switches and routers to a hypervisor-based-software-control-layer provided by VMware will negatively impact networking hardware revenue and margins over the medium-to-long term. SDN technology is a major source of concern for hardware vendors like Cisco, who currently generate a major chunk of the total revenues from switching and routing. Although Cisco holds an equity stake in Nicira’s competitor Insieme and an option to buy at $750 million, we believe that Cisco will need to react quickly to provide its own set of SDN solutions or it will have a detrimental effect on Cisco’s revenues over time.
Implications for VCE alliance:
Cisco has been in an alliance with VMWare and EMC (NYSE: EMC) that resulted in the development of Cisco’s Nexus 1000v virtual switch. VMware's move to acquire Nicira will ultimately have a negative impact on the alliance as Cisco will likely take it as an attack on its business. Although both the companies are denying this case in their recent press releases, we believe that this development could change Cisco’s long‐running relationship with VMWare/EMC and might eventually result in the loss of software technology development partners for Cisco.
Cisco’s latest staff cuts:
Cisco announced a headcount reduction of about 1,200 employees or 2% of its workforce. Although this action is a part of the on-going adjustments that the company has been routinely making, it does not come as good news. Though we would hesitate to draw any material conclusions from this announcement, we remain cautious considering the negative market sentiments this layoff could generate.
Juniper trying to follow up:
Recently, Juniper Networks (NYSE: JNPR) struck a major partnership and technology licensing deal with Riverbed Technology Inc. for WAN optimization and application delivery controllers. This partnership will exert pressure on Cisco stock as it gives Juniper Networks the ability to attack Cisco on other fronts apart from SDN.
Cisco faces increasing competitive pressures and product transition risks as network virtualization gains traction. We believe that if Cisco needs to thrive in this competitive landscape it has to do a series of acquisitions to gain ground in the multi-billion dollar SDN market. As we wait for any strategic steps from Cisco in the near term, we rate Cisco as avoid.
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