The rise of SDN is serving as an “existential threat” to networking market leader Cisco, which is bound to put pressure on the vendor's market share and revenue margins, CM Research warns.
The investment analysts have assigned a negative outlook to Cisco stock, despite several factors in its favor, ranging from solid recent revenue growth to a seemingly cheap valuation on a peer group ranking of vendors' share prices.
Cisco still supplies 59% of the world's switches, 53% of its routers and 52% of data center equipment. But the encroaching era of software-defined networking is expected to be hugely disruptive to the vendor because it fundamentally changes who controls the telecom network.
The company is caught between a rock and a hard-place, CM Research said. If it ignores the open standards movement tied to SDN, it could be sidelined, but if it embraces SDN too quickly it could squeeze the company's short- and medium-term revenues and profits.
Compounding the problem, the disruptive threat is expected to hit virtually every market Cisco operates in simultaneously.
The vendor has traditionally enjoyed margins well ahead of its industry peers – at 23.7%, its margins are nearly double the industry average.
It will take some time for SDN to truly get off the ground, CM Research said, so the threat isn't exactly pressing. But that doesn't change the fact that Cisco is a hardware company in an industry in the middle of a software revolution.
“Cisco may well come through this threat as the world leader in SDN technology,” the firm said in a research note. “But that is several years away. In the next two to three years, it faces a very difficult transition. It finds itself in the position that Alcatel, Lucent, Nortel and Ericsson found themselves a decade or so ago.”
Cisco also risks getting caught up in the telecom equipment trade-war between China and the US, and the surveillance revelations of former NSA contractor Edward Snowden.