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Cisco shares outstrip Fortinet and Palo Alto Networks declines in smart city transition

The smart cities market is set to expand, which could bring long-term growth opportunities for the share prices of cybersecurity and computing firms like Cisco Systems, Fortinet and Palo Alto Networks.

Tech stocks such as Cisco Systems [CSCO], Fortinet [FTNT] and Palo Alto Networks [PANW] are set to play a key role in building the cities of the future to be smart, secure and sustainable.

Smart cities will rely on the internet of things (IoT) and use connected devices and sensors to enable an array of applications. These include smart parking, smart street lighting and advanced electric vehicle charging stations as well as reliable and real-time data monitoring.

If a city is to be truly smart, it needs to have the right infrastructure. This includes a widespread rollout of 5G mobile networks, which will enable a faster, smoother and more stable internet connection. One report published in April estimates that the smart cities market will be worth almost $7trn by 2030, with a compound annual growth rate (CAGR) of 24.2%.

The iShares Smart City Infrastructure UCITS ETF [CT2B.L] is down 13.5% since the start of the year through to 26 May as the broader tech selloff weighs on key holdings, but investors are unlikely to be too concerned as smart cities are a long-term investment theme.

Leading declines out of its peers is the Cisco share price, which is down 28.1% year-to-date to $44.99 at the close on 26 May. In comparison, the Palo Alto Networks and Fortinet share prices are down 9.8% at $502.09 and 18.1% at %294.30, respectively, over the same period.

Cisco helps enterprises to scale up

The San Jose-headquartered technology giant is a leader in IT and networking. Among its products is a suite of industrial routers that facilitate 5G capabilities. Essentially, they enable companies and organisations to run connected operations on a larger and wider scale. The company also helps enterprises to keep up with fast-paced innovations by scaling up their systems so they can handle greater data loads.

Performance in these areas was reported to be strong in Q3 2022, according to the earnings call earlier in May. CEO Chuck Robbins said that it was a sign that it’s the company of choice for enterprises that want to digitise their operations to deliver better experiences. Despite the positive report, the stock hit a 52-week low of $41.02 on 19 May — the day after its earnings release.

The company did previously offer a data package to build smart city solutions, Cisco Kinetic, but it announced in 2020 that it would no longer sell it from 2021 onwards and the product would become obsolete in 2024. It gave an interview to the Wall Street Journal in which it said its smart cities push “weighed on Cisco’s core businesses”, while the pandemic had also dented city budgets for infrastructure spending.

Palo Alto Networks: a 5G security play

As cities become more connected and there are more devices talking to each other and sending data, the risk of cyberattacks will increase dramatically.

The push into smart cities is being let down by data security, argued Palo Alto Networks in a blog post. “Smart cities are the next big thing, and they’re going to take urban living to the next level. However, the interconnectivity in smart cities is both their greatest strength and greatest weakness.”

The company sells a diverse range of cybersecurity products, most notably for 5G security, which helped the stock reach an all-time high of $640.90 on 20 April. According to a MarketsandMarkets report published in May, the 5G security market will be worth $7.2bn by 2027, growing at a CAGR of 41.6%. Palo Alto Networks and Cisco have been named as two of the US market leaders.

Fortinet: Securing IoT devices

Fortinet was another vendor named in the MarketsandMarkets report. The Sunnyvale-headquartered company sells security solutions for a range of environments which are accelerating the adoption of IoT and connected devices and sensors. As well as smart cities, its products are used by the manufacturing and oil and gas industries.

As EMEA chief information security officer Joe Robertson explained in a recent blog post, “being smart just makes you more attractive to hackers”. “With each new smart device introduced into the network, the risk increases because each device is a potential new entry point for attack.”

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