A lackluster quarterly earnings report from Cisco Systems Inc. (CSCO) may spell good news for its competitors in the the computer hardware space, according to one team of analysts on the Street.
Erik Suppiger of JPM Securities, who rates legacy computer networking provider CSCO at market perform, wrote a note suggesting that "the results bode well for a number of our vendors under coverage," including cloud networking rival and long-time CSCO foe Arista Networks Inc. (ANET), Nutanix Inc. (NTNX), Pure Storage Inc. (PSTG) and security vendor Palo Alto Networks Inc. (PANW).
On Wednesday after market close, Cisco investors were disappointed by earnings that just met consensus estimates. Yet positive indicators such as a 11% increase in orders from enterprise customers in the first three months of the year could signal strength for other hardware and software vendors, indicated JPM Securities.
ANET to Gain on Enterprise and Campus Switching Strength
Suppiger wrote that strength in data center and campus switching demonstrates that "demand trends are favorable for Arista as the company expands into enterprise and campus switching environments."
As spending by "hyper-scale" cloud customers such as Facebook Inc. (FB) and Microsoft Corp. (MSFT) is expected to continue to drive cloud capex, Arista has been highlighted as one of the major beneficiaries. Those on the more bearish side note that competition has intensified in the space. Last month, ANET fell nearly 10% on a warning from Cleveland Research that the company could lose out to off-brand rivals offering "white box equipment" and faces pressure from more "aggressive" pricing by Cisco. (See also: Arista Stock Slips, Investors Fear Customers May Flee.)
Security Demand to Boost PANW, DC Growth to Benefit NTNX
Shares of the San Jose, California-based company jumped last week on enthusiasm coming off of its annual analyst meeting in which Arista announced a handful of new products that directly compete with Cisco in the campus networking space. Bulls peg the market opportunity at around $3 billion to $4 billion, while Arista does not expect "material" revenue from the initiative until 2020.
Trading up 0.8% at $249.50, ANET has gained 5.9% year-to-date (YTD) and 73.6% over the most recent 12 months, outperforming the broader S&P 500's 1.6% increase and 14.9% return over the same respective periods.
Double-digit growth in Cisco's security segment for the first time in over 12 months "demonstrates a robust cybersecurity market," wrote JPM Securities, "a favorable trend for Palo Alto that has yet to report its April quarter." Cisco's data center business also grew in the double digits over the last year, "highlighted by the strong adoption of HyperFlex, its hyperconverged infrastructure (HCI) product," which signals demand is favorable for Nutanix, wrote the analyst. (See also: 8 Stocks to Thrive as 2018 Cloud Spending Soars.)