Cisco Systems, Inc. Poised for a Blowout 2015

As the tech world shifts to cloud, big data, and Internet of Things (IoT)-related solutions, some of the biggest names in hardware have taken it on the chin in 2014. IBM's dismal stock price performance demonstrates the difficulties old-line tech giants are facing. That said, Cisco has managed to buck the trend, and its stock price reflects its stellar performance year-to-date.

There are naysayers who suggest Cisco is facing significant challenges in the months and years ahead, and they're right. But the question investors need to ask is whether Cisco is positioned to continue making inroads in key markets like cloud and IoT, or, as Cisco calls it, the Internet of Everything (IoE). If last quarter's financial results and recent steps Cisco has implemented are any indication -- and they are -- the answer is a resounding, "yes."

On a roll

When Cisco announced its fiscal Q4 and year-end earnings results this past August, investors were less than impressed. Revenues were flat compared to the year earlier period, as was net income and operating income, and Cisco's stock price took a slight hit. To investors' credit, many looked beyond Cisco's topline and took note of its improved gross margins and the positive impact of its timely share buybacks, which decreased the number of shares outstanding, resulting in improved net income per share.

Just as important as Cisco's fiscal year-end results was CEO John Chambers confirmation that the transition to new technologies is continuing, and will drive future growth. As Chambers put it, "We are focused on growth, innovation and talent, especially in the areas of security, data center, software, cloud and Internet of everything."

Cisco's transition efforts really paid off last quarter, fiscal 2015 Q1, setting a record for revenue and boosting its cash and equivalents to $52.1 billion, up from the prior year's $48.2 billion, after spending nearly $2 billion on dividends and buying back 41 million shares. Not a bad quarter's work, and worthy of Cisco's current stock performance.

As strong as Cisco's recent quarter was, what really bodes will for calendar year 2015 and beyond is its focus on IoE, particularly "smart" cities. Following up last quarter's news that Cisco had partnered with the city of Hamburg to develop smart traffic, infrastructure, and street lights via the cloud, it announced a similar deal with Berlin. So, you ask? Over the next 10 years, smart cities are expected to become a $1.5 trillion industry, and Cisco's leading the way.

What to do for an encore?

According to a report from Gartner, on a relative basis Cisco blew away IBM and other server sales leaders in the recently completed Q3. Cisco's server revenues climbed nearly 31% compared to last year, hitting $783.7 million, up from 2013's $599.3 million. Granted, Hewlett-Packard and IBM remain the clear leaders, but both lost market share to Cisco.

Why is Cisco's hardware business improving? One of the primary means of profiting from IoE is securely collecting, collating, and utilizing data, unprecedented amounts of data, specifically via the cloud. Chambers gets it, which is why Cisco is laser-focused on providing networking solutions and affiliated services that address this integral part of IoE.

For investors, Cisco's stock price run may be worrisome, but it shouldn't be. Even as Cisco's share price bumps against its 52-week high, it's still trading at just over 12 times next year's earnings. That, combined with its IoE network leadership position, will drive Cisco to an even better 2015.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Gartner. 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.

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