Should I Buy Cisco Stock?

Cisco stock price movements were muted today (Thursday) on an earnings beat yesterday.

While Wall Street trading activity remains subdued on the data networking giant, this earnings season is actually a pivotal time for the company.

This is the last earnings season where the veritable face of Cisco Systems Inc. (Nasdaq: CSCO) for 20 years, John Chambers, will preside over his networking empire. He's handing the job off to Chuck Robbins in July.

"I'm encouraged to see they're changing leaders," Money Morning Defense and Tech Specialist Michael Robinson said. "I think that Chambers has been there a little bit too long, he's been at the helm a really long time."

And while Cisco is more of a dominating market presence in the world of data networks than it is an aggressive innovator - and Robbins by extension is no revolutionary - there are going to be pressures to make bold moves as enterprise tech evolves.

Which makes right now, after a Cisco earnings beat and before a change at the top, a good time for investors to ask themselves, "Should I buy Cisco stock?"

Here's what you need to know before you buy Cisco stock...

Cisco Stock: A Play on Data Networking Hardware

There's no denying Cisco's market presence.

When it comes to network hardware, Cisco is the undisputed leader.

They lead market share in switches at 56.8%, routing at 47.8%, data center network hardware at 46.9%, and even to a lesser extent, IP telephony and Wireless LAN at 28.3% and 24.7% respectively, according to Bloomberg Intelligence.

What is troubling about this, however, is that while Cisco is going to be hard to topple, its market share is being chipped into by a couple of scrappy players.

"The challenge for the new CEO will be defending market share," Money Morning's Robinson said.

The biggest thorn in Cisco's side is Juniper Networks Inc. (NYSE: JNPR). Juniper is by no means a serious threat to Cisco's dominance, but they do have the ability to steal revenue from them.

For example, Cisco's market share for switches was at 64.5% in 2010, and fell to just around 57% in 2014. Juniper's has grown from 1.8% to 3%. In data center networking hardware, Cisco has fallen from 58.7% in 2014 to 46.9% - Juniper has grown from 2.1% to 3%.

Goldman Sachs (NYSE: GS) is a Juniper client, for example.

And Cisco will further be challenged in Asian markets by its Chinese counterpart Huawei Technology Co. Ltd. Huawei has grown routing market share from 6.9% in 2010 to 12.8% in 2014, while Cisco's has fallen from 55.3% to 47.8%.

So what does this mean for Cisco stock as a legacy tech player?

Not much. Juniper will be, at most, a bothersome fly Cisco has to swat down, stealing small pieces of market share here and there. And Huawei will reach a high-water mark, as they deal primarily in domestic markets and don't really seem poised to break into the United States.

What investors looking to buy Cisco stock should keep a more discerning eye on is not the legacy networking hardware, but how Cisco is going to adapt to what could be a big shift in the industry as a whole.

Here's what Cisco stock is going to be challenged with moving into the future...

The Long-Term Value of Cisco Stock

The big game changer right now in enterprise tech is virtualization, or so-called "virtual machines."

This is a move from hardware-centric architecture to application-centric infrastructure.

Cisco has the hardware. Cisco's main challenge now is deciding whether it wants to make the big shift to software-defined networks (SDNs) and cannibalize the hardware businesses or use its market position to go all-in on hardware and blunt the growth of SDN.

The SDN market is expected to grow from $3.4 billion in 2014 to $35.6 billion in 2018, according to SDxCentral.

Cisco currently holds about a 44% market share in all data network hardware, which was an $18.4 billion industry in 2014.

Cisco will likely move with the shift, and already has to some extent, but it remains to be seen how rapid its move will be. And if it moves too slow in innovating on this front so as to let a player like Juniper take over.

If this happens, then the loss of market share already underway will be much more pronounced.

This is the most immediate danger for Cisco stock.

Cisco also has its hands in the Internet of Things (IoT) trend, namely the growing interconnectivity of everyday devices, with products facilitating communications between these devices. Just how big an impact this will have on Cisco's revenue is unknown right now.

But even with all these changing enterprise tech trends, there's little to suggest Cisco is going to collapse under the pressure. Cisco stock still has value in a portfolio.

"They still make good products," Money Morning's Robinson said. "It's one of those big-cap companies that I think is a good foundational play."

The Bottom Line: You can't do wrong with Cisco stock right now. Cisco's massive market share and brand name is not going to go away, even if it does have to face some very minor competition and headwinds from a changing enterprise tech landscape. Even with all that, the fact still remains that Cisco is the company to go to for data network hardware, and that's enough to give Cisco stock some consideration in your portfolio.

Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.

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