Leading telecom and internet equipment provider Cisco Systems, Inc. (NASDAQ:CSCO) announced its strategic partnership with Ericsson (ADR) (NASDAQ:ERIC) on Monday to create the biggest network of mobility, networking and cloud computing, dubbed the “Network of the Future.” The network will serve enterprises and the fast-growing Internet of Things (IoT) ecosystem through 5G and cloud computing technologies that are fast gaining ground. But what will this mean for CSCO stock?
This Could Be Huge for Cisco Stock
This strategic partnership will open doors to both companies to take access to over 56,000 of their joint patents. (Source: “Ericsson & Cisco Partner to Create the Networks of the Future,” Cisco Newsroom, November 9, 2015.) Ericsson, which holds around 37,000 of these patents, is set to receive a fee from Cisco under the partnership.
The two companies, which were earlier placed as competitors in the networking industry, are now joining hands to share not only their intellectual property but also their research and development investments and their costumer services across 180 countries around the globe.
Cisco already enjoys the global leadership status in the software-defined networking (SDN). The company’s ethernet switches hold over 60% of the world market share with the only close competitor being HP Inc. (NYSE:HPQ), with a market share of only 10% or so. (Source: “Global Market Share held by Ethernet Switch Vendors,” Statista, last accessed November 9, 2015.)
Ericsson, on the other hand, is a leader in wireless networking with 40% of the global mobile traffic currently carried through Ericsson networks. Cisco-Ericsson partnership comes just in time after the Nokia-Alcatel merger got a green signal from EU regulators.
A month ago, the merger deal between Nokia Corporation (NYSE:NOK) and Alcatel-Lucent (NYSE:ALU) got finalized, under which the two companies will expand their 5G and mobility networking. The latest deal between Cisco and Ericsson will help the two to thwart the competition posed by Nokia and Alcatel.
The two companies are expected to generate incremental revenue off of the deal starting in 2016 and are set to make over a billion dollars each in revenue by 2018 and beyond.
Cisco has been actively expanding its business scope—acquiring two analytics businesses for security software and Internet of Things last month. The merger with Ericsson will also focus on the two segments, to improve network firewalls, stall intrusive attacks on networks, and create a safe IoT ecosystem.
The concept of “Internet of Things” has become exceedingly popular in the last few years as more and more of our daily use devices get connected to online networks to send, receive, and exchange data. Today, the next generation devices are more connected remotely to networks than ever in the past.
With the growing IoT ecosystem, concerns like security, data storage and speed have been in question. The latest partnership between Cisco and Ericsson will put them at the top of the IoT networking industry just in time as the industry is gearing up to expand.
The Bottom Line for CSCO Stock
The new partnership is poised to make CSCO stock a growth play for the next two years. Cisco saw its all-time highs in the $70.00 range during the dot-com bubble but has since then fallen to the $20.00 range, which many cited to be a value trap. The stock has, however, been up over three percent year-to-date and over 41% in the last five years—which isn’t so much of a trap.
Fundamentally, CSCO stock is a promising investment having a hefty institutional interest with over 77% of its outstanding float held by institutions. It holds a whopping $60.0 billion in cash and short-term investments, boasts a healthy dividend yield of over 3.25%, and has consistently stepped up dividends for the last five years.
The bottom line is that CSCO stock could double well within the next two years.