- The supply chain crisis has made networking hardware scarce, but it’s boosted business for sellers.
- Stocks like Cisco, Arista, and Juniper have had historic runs amid spiking order rates.
- But these firms will likely take a hit and face cratering order rates when supply chains improve.
The global supply chain crisis has made it harder than ever for buyers to get their hands on networking hardware. But for the firms selling that hardware, business is booming.
Networking companies like Cisco, Arista, Juniper, and Hewlett Packard Enterprise have all seen spiking orders for network hardware in recent quarters, driven by customers ordering parts much further in advance than they normally would. At the same time, the scarcity of parts has enabled those firms to hike prices without fearing a drop in sales, and their stocks have surged as investors react to record order rates.
But the unprecedented supply chain crisis won’t last forever — and the fallout for their businesses could come when supply chains improve, according to Needham analyst Alex Henderson.
“This has never happened before,” Henderson said, noting that he’s never seen anything like the current crisis since he started researching the industry in 1986. “We’re still trying to figure out what happens next.”
Most firms’ order rates have vaulted by 30% to 50% every quarter over the past year. Cisco saw 37% growth, its highest enterprise order growth in 12 years, and now has a backlog of $14 billion, an increase of 150% from the year prior. Similarly, Juniper has a “record level” backlog of more than $1.8 billion, the company said in its last earnings call. Arista reported a similar backlog, telling investors it could take up to 70 weeks to fulfill current orders.
The reason for the spike isn’t just increased buyer interest — it’s because buyers are placing orders to cover their hardware needs far into the future, rather than ordering a few weeks in advance as they would in normal times.
“As that duration rubber band stretches, you’re capturing orders that are not just for the current quarter, but for multiple quarters. And that inflates the rate of implied order growth,” Henderson said.
Hardware companies won’t see the revenue from those orders until the parts ship, but they still reported the sky-high order rates in quarterly earnings calls, leading to historic stock runs at each company. Arista’s stock is up 67% year-over-year, while Juniper’s is up 30%. Cisco, which has a much larger portfolio spanning several software categories, is up 12% year-over-year.
The scarcity of parts has also enabled these companies to hike prices by an average of 10%, which will likely stay in place for the foreseeable future as supply chains seem unlikely to improve in the first half of this year, according to Henderson.
But the surge has to end eventually. When supply chains return to normal, sellers will likely have to issue discounts and brace for cratering order rates. The only question is when that will happen, Henderson said.
“What happens if the rubber band starts to return to its normal shape? You could end up with orders down 10, 15, 20% against a spike that that was temporary,” he told Insider.
Networking company executives have acknowledged that supply constraints are driving a surge in orders, but they insist the growth won’t be fully wiped out by better supply conditions.
When asked during a February earnings call whether Cisco’s order growth was driven by market conditions like supply constraints or by the company’s own merits, CEO Chuck Robbins said it’s “a combination of both,” adding that the coming year will be “a litmus test” on that question.
“Certainly, the math will get tougher here in the next couple of quarters,” Robbins said.