Cisco & HPE Face Stiff Competition From Small Vendors In The WLAN Market

Networking giant Cisco (NASDAQ:CSCO) is most widely known for manufacturing network routers and switches. In addition, the company also operates in other market segments including converged systems, wireless LAN (or WLAN) hardware equipment, video conferencing and business messaging software suites, network security software suites and cable access hardware infrastructure. According to our estimates, the Network Security, Data Center and WLAN segments combined make up roughly 13% of our $150 billion valuation for Cisco. Out of this, the WLAN segment alone is worth approximately $9 billion, or 6% of our $30 price estimate for Cisco. Below we take a look at the WLAN market and Cisco’s growth prospects in the space.

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WLAN Market Size & Cisco’s Presence

The rapid proliferation of wireless devices in recent years has impacted the work environment as well as people’s work habits, making Wi-Fi an absolute necessity in the office as well as public space. This is indicative of the diversity of verticals into which the WLAN market can expand. Cisco has enjoyed a near-50% share in the wireless LAN equipment market, with the nearest competitor Aruba – owned by Hewlett-Packard Enterprise (NYSE:HPE) – capturing less than 20% of the share in this market. Over the last three years, the wireless LAN market has grown at less than 10% a year, which is much higher than the overall computer hardware and infrastructure market. As shown in the table below, Cisco’s revenues from wireless LAN products grew at around 8% to $2.6 billion in 2015. As a result, its share fell slightly from around 52% in 2013 to just over 50% in 2015.

HP acquired Aruba Networks for $2.7 billion in mid-2015 to expand its presence in this domain.  ^[1] At the time, HP’s share in the market was around 4-5%, while Aruba’s share was around 12-13%. ^[2] The acquisition has not impacted Cisco adversely over the last few quarters, with the company maintaining its dominant position in the market. Cisco’s WLAN revenues grew by 7.5% in 2015 to $2.6 billion.

The market has continued to grow in high single digits through the first half of 2016 thus far. However, both large vendors (Cisco and HP) have witnessed a slowdown in product sales in 2016 as smaller WLAN vendors have gained share from existing players. The combined revenue generated by companies outside the four largest WLAN equipment manufacturers has grown by 23% on a year-over-year basis. ^[3] Moreover, the combined market share of vendors outside the top 4 sellers has increased to around 28% of the market, up from 25% in 2015. ^[4]

We forecast Cisco’s WLAN revenues to grow at over 3% in 2016 to $5.4 billion. This slowdown could continue over the next few years, with Cisco likely to lose share to small vendors in the same period. Although Cisco’s new product lines (particularly Meraki) continue to witness strong demand for product sales, the company’s WLAN segment is growing at a pace slower than the overall WLAN market. As a result, we forecasts Cisco’s WLAN product sales to grow by around 4-5% over the next three years.

Have more questions on Cisco? See the links below.

• Cisco’s WLAN Dominance Unlikely To Be Affected By HP’s Aruba Acquisition
• How Has Cisco’s Revenue Composition Changed In The Last Five Years?
• Where Can Cisco’s Network Security & Other’s Revenue Growth Come From In The Next Five Years?
• Cisco Takes A Leap In IoT With Jasper Acquisition

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1. HP to buy Wi-Fi gear maker Aruba Networks for $2.7 bln, Reuters, March  2015 [↩]
2. Wireless LAN Infrastructure Market Grows Six Percent, According to Dell’Oro Group, Market Watch, Sep 2014 [↩]
3. Worldwide WLAN Market Q1 2016, IDC Press Release, June 2016 [↩]
4. Worldwide WLAN Market Q2 2016, IDC Press Release, September 2016 [↩]