Despite ALU's recent performance, the stock is still trading at an incredibly low price-to-earnings ratio (P/E) of 3, which is 23 points lower than Adtran.
This means ALU is still trading at cheap valuation, making it an attractive candidate for a company such as Cisco Systems.
Granted, ALU is expected to lose money this year — that's not a surprise. However, with a recent financing pact worth $2.1 billion, ALU has been given time to get its house in order.
This new financing now gives the company some flexibility and latitude to extend maturities accordingly. With liquidity no longer a concern, ALU can begin focusing on execution to enhance shareholder value. With some recent upgrades under its belt, there are now a few more catalysts making the shares more appealing.
With ALU trading considerably below its true potential, Cisco should follow Oracle's lead and make the call.
For instance, many underestimate ALU's IP and optics business, which is trending higher. Plus, the company's newest routing platform already competes well against similar models from Cisco; in some cases ALU's model is better.
Likewise, ALU has an impressive CloudBand strategy that rivals of some of the more prominent names in the industry, even Cisco's. For this reason, I question how long it will take before Cisco realizes it needs ALU.
Cisco's recent acquisitions, which includes paying $141 million in cash for Cariden and another $1.2 billion for Meraki, suggests the company will leave no stones unturned to produce growth.
The cloud market expected to grow to $177 billion over the next three years, so it would be foolish for Cisco to not consider acquiring Alcatel-Lucent at a time when ALU shares can be had for pennies on the dollar. For that same reason, it would also be foolish for investors not to consider ALU.
Although carrier spending has yet to fully recover, industry experts believe an increase in demand is imminent, although to what extent remains to be seen. But 2013 can't possibly be worse. This was precisely what Oracle was thinking.