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Why the Internet of Things Is Good News for Cisco Investors
Posted by: kcpl (IP Logged)
Date: May 20, 2014 02:47PM

Cisco (CSCO)'s blog written back in 2011 on the potential of the Internet of Things — machines communicating with each other in an uncomplicated manner, beginning with a simple alarm clock — demonstrates the capability of IoT.

The Concept

Let’s consider that there are a number of inanimate objects in a home such as alarm clocks, a treadmill, a car, mobile devices, etc. Presently, these might be managed by a smartphone that helps you organize much of your day including tracking your fitness, providing traffic information, or even controlling the lights and other electrical equipment. However, an individual must input commands to make them work. Without commands from human beings, none of this is going to work.

Now, suppose that you are sleeping. Your day begins when the alarm clock rings and wakes you up. Let’s consider that there are certain contingencies waiting for you on a particular day like an accident on your way to work, or a delay in the meeting you were scheduled to attend.

You wish that your alarm clock somehow knew of these events and adjusted its ringing schedule accordingly. The clock gets signals and alerts from its sources about the delayed meeting or the accident on the way to work, waking you up early or allowing you to sleep till the right time arrives.

Going forward, Cisco considers that this communication among things known as the Internet of Things might be a $19 trillion opportunity which is not impossible at all. This opportunity is indeed huge if every clock, item of gym equipment, car, or even a simple coffee maker in the world comes in-built with Wi-Fi and data.

By the end of the decade, Cisco expects such connected objects to become close to 50 billion. Cisco’s senior vice president cited that the “Internet of Everything is the biggest transition for the Internet since the birth of the Internet.” And this transition is expected to be worth $19 trillion.

How Cisco Will Profit

The main question now is how to profit from it? The first obvious answer would be Cisco as it is spearheading this evolution. Now, Cisco is a networking and telecommunication equipment behemoth, and is right in the middle of this boom. The amount of data should increase manifold with more and more devices connecting to the internet and to each other. This must create huge demand for Cisco’s equipment, along with software, services and other applications.

Cisco has a dedicated team that focuses on the Internet of Everything and its various applications as this is probably its next big growth driver. Cisco’s traditional business is in distress. The company was forced to slash its three-to-five-year growth outlook last year due to weak sales of telecom equipment and sluggish demand from emerging markets. This makes its success in the evolution of the Internet all the more important.

Hence, to make connections among the Things in the Internet of Things easier it recently unveiled “fog computing.” Cisco is finally looking to incorporate computing capabilities in its routers to stop wastage of time and resources in case of applications where data doesn’t need to be sent to the cloud through this initiative.

Fundamental Analysis

Cisco believes that companies will see a major boost in productivity and profits through the Internet of Things. This technology is expected to boost corporate profits by 21% globally through its application in different areas such as manufacturing, mining, transportation, etc., by 2022.

The forward P/E ratio is very low at just under 12 times trailing earnings, Cisco could prove to be a solid bet for those who are looking to profit from the Internet of Things. Although the company has struggled in recent times, the Internet of Things could take a few years before making a big impact on its earnings. But, since the opportunity is huge and Cisco has an impressive dividend yield of 3.10%, there are quite a few reasons to hold the stock and wait patiently.

GE Can also Benefit

General Electric (GE) is another huge conglomerate that’s looking to make the most of the Internet’s evolution. It’s focusing on the Industrial Internet, or the Internet of Things for industrial applications. This is an extension of the Internet of Things where machines and industrial equipment communicate with each other.

Last year, the 10 Industrial Internet products that it had launched in 2012 allowed GE to earn $290 million in revenue, and it already has 14 new customers for the 14 products launched in 2013. The Industrial Internet is expected to help boost GDP to the tune of $10 trillion to $15 trillion in the next two decades through smarter machines that should help cost savings, according to GE management.

However, Cisco is bound to become a key player in GE’s Industrial Internet which shouldn’t be forgotten. These two companies are already into a partnership for the initiative as Cisco will be providing data processing and analytics to GE.

Conclusion

The Internet of Things provides a big opportunity for the players involved, such as Cisco and GE. However, there are some more companies that are estimated to play an important role in enabling the Internet of Things, giving investors more options apart from the two tech giants.



Stocks Discussed: CSCO, GE,
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