2 Server Companies to Invest in Now

By Markets Fool.com

Cloud computing, a seemingly endless number of mobile devices, and the advent of the Internet of Things (IoT) have resulted in the availability of an unprecedented amount of data. And as more of the world becomes connected, the volume of information will continue to grow.

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Of course, collecting all that data and actually utilizing it to make informed business decisions, improve target marketing capabilities, and make our day-to-day lives (presumably) more efficient via IoT are different matters entirely. Housing and analyzing so much information takes tremendous amounts of computing power, much of it cloud-based, and that's where servers enter the picture.

Data centers are becoming bigger and more powerful, and we're still in the early stages of assimilating all that information. For investors, that equates to opportunity. Intel already the world's dominant provider of chips for servers along with up-and-coming server provider Cisco are both positioned to reap the rewards of server sales growth.

Good news, bad news
Based on its stock price immediately following news of Intel's fiscal 2015 Q1 financial results released April 14, it appeared investors weren't overly impressed. That said, shares soon started heading back up, which is as it should be. Why? Because just as in prior quarters, investors and analysts alike continue to measure Intel by the results of its Client Computing Group, which includes its PC-related sales. The slowing PC market once again hit Intel, with sales in the unit declining to $7.4 billion, an 8% drop compared to 2014's Q1.

But CEO Brian Krzanich made it clear from day one of his taking the helm that Intel was moving in a new direction, one that includes IoT, the cloud, and data centers. And in these critical of areas, Intel is performing admirably, and its commanding position in servers in particular bodes well going forward.

Intel owns over 90% of today's server chip market, and its 19% year-over-year jump in Data Center revenues last quarter to $3.7 billion is an indication it's not losing its grip in this fast-growing area. Data Center Group sales were up, as were the unit's average selling price, and with the shift to the cloud and IoT gaining steam, Intel stands to continue its domination in this all-important area.

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Not so little anymore
To be sure, global server sales are still led by the likes of Hewlett-Packard and IBM as measured by sheer volume. But according to a report from Gartner, far-and-away the fastest growing domestic provider of servers is Cisco. Like Intel's Krzanich, CEO John Chambers has steered Cisco toward cloud and related solutions, including honing in on the server marketplace.

The good news for investors is twofold: (1) One, Chambers' efforts are working, and (2) there remains tremendous upside for Cisco's server growth. IBM's server market share declined 50% in Q4 as measured by revenues year-over-year, HP sales were essentially flat, and both lost market share. Cisco, on the other hand, enjoyed a nearly 20% jump in server revenues and increased its piece of the overall pie to 5.7%, from 2013 Q4's 4.7%.

As he has at the beginning of the last several quarterly earnings calls, Chambers alluded to Cisco's "transformation" to burgeoning markets like the Internet of Everything (IoE), the cloud, and big data -- among others -- as the driving force behind Cisco's financial performance. And it's working. Revenue and net income both jumped again last quarter, and Cisco also continued its share buyback initiative.

To date, Cisco has bought back a whopping 4.4 billion shares -- and here's the really good part -- at an average price of $20.73 a share. On April 14, Cisco shares closed at $27.81. That's the way share buybacks are supposed to work.

Creeping up to a 5.5% share of the server market may not get some investors overly excited, but for those with longer-term time horizons, Cisco's relatively small piece of the marketplace today translates to even more potential upside going forward. It's trending in the right direction, and Chambers has Cisco focused on continuing to make inroads in server sales. Like Intel, Cisco also boasts a 3% dividend yield and both are relatively inexpensive compared to their peers, making them two good bets in the fast-growing server market.

The article 2 Server Companies to Invest in Now originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Gartner, and Intel. The Motley Fool owns shares of International Business Machines. 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.