Stop Ignoring This Tech Stock

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

Technology companies come and go. The disruptive nature of the industry makes picking long-term winners a difficult task. However, sometimes market leaders have such a strong grip on their core markets that long-term investors are rewarded.

I believe that is the case with Cisco Systems (NASDAQ: CSCO). Cisco is absolutely dominant in its two core markets: switches and routers. Although the company is still at risk of losing out to a disruptive technology, it is unlikely to cede significant market share in either market over the next three to five years.

Market dominance

Cisco's dominant share of the switch market give it an important scale advantage over smaller competitors. The company's share of Ethernet switches has not dropped below 60% in any of the last five years. Even as Hewlett-Packard (NYSE: HPQ), Juniper Networks (NYSE: JNPR), and others make significant investments in this arena, Cisco maintains a dominant market share.

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Even as the second-largest competitor in the market, HP does not stand a chance at unseating Cisco -- or even stealing significant market share; HP's share is less than one-sixth that of Cisco. And even though Juniper has made significant gains in this market, it is still too small to make a meaningful dent in Cisco's share.

In addition to the scale advantages that come with being the largest player in the market -- and the higher R&D budget that comes with it -- Cisco benefits from inertia among IT managers. Cisco's reputation for high-quality products and customer support make it the preferred provider of risk-averse IT managers, and many IT managers have bought Cisco switches for as long as they have been available. It is unlikely that a manager would suddenly change vendors unless product quality goes downhill.

In addition to switches, Cisco also has a strong market share in routers. However, the company faces more competition in this arena from the likes of Juniper and others. Juniper and Cisco have split the market for high-end core routers, and Juniper has successfully stolen market share from Cisco in carrier routers over the last year.

However, it is unlikely that Juniper will be able to make a significant dent in Cisco's market share in either of its core markets; Cisco is simply too big and too integrated into its customers operations.

Meanwhile, HP is distracted by the declining PC market, which is sure to continue its downward trajectory as tablets, smartphones, and similar devices increasingly perform the most useful tasks that only PCs used to be able to do. In addition, Cisco's investment in server technologies -- one of HP's core markets -- makes HP's future look quite dim.

Bottom line

Cisco will look quite different in 20 years than it does today; the technology sector is simply too innovative to permit routers and switches to persist in their current form for that amount of time. However, Cisco's dominant share of these markets make it likely thatCiscowill lead the innovation -- or at least catch up quickly.

In the meantime, investors can enjoy the company's high and stable market share -- and the high and stable profits that come with it. A 15 earnings multiple for a growing company in an overheated market may be too good of a deal for long-term investors to pass up.

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Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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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