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Having initiated a business transformation several years ago, the tech giant Cisco (CSCO) - Get Free Report  has now reported several quarters of strong revenue growth. And the guidance for the next quarter confirms this trend.

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In the meantime, thanks to its strong free cash flow, the company returns several billion dollars per quarter to the shareholders in the form of dividends and share buybacks.

Yet the market values the company at a PE ratio below 15, after subtracting the $24.5 billion net cash position. This valuation doesn't reflect the importance of the scale advantage for Cisco.

Compared with Cisco's annual revenue of close to $50 billion, other network and security vendors are tiny. Juniper (JNPR) - Get Free Report , Cisco's closest competitor from a product and services portfolio perspective, generates only about 10% of Cisco's revenue.

Let's have a closer look at three ways Cisco profits from its huge scale.

1. A Complete Portfolio

Over the last few decades, the networks consisted of connected devices that provided the infrastructure for the servers and computers to run on top of it. But during the last few years, the networks grew more complex with the appearance of cloud networks and their associated services (programmability, integration, automation, etc.). And with that extra complexity, simplification is becoming increasingly important.

Cisco's portfolio covers the whole data center infrastructure, from security to servers, and of course, including all network devices for any type of business. Thus, Cisco has the potential to provide a common framework to integrate and simplify the management of all these systems. The alternative for customers consists of managing several independent solutions from different vendors.

2. The R&D Advantage

Compared with other network and security vendors, Cisco spends a smaller part of its revenue for the R&D. But with much greater scale, the company allocates a superior absolute amount to this expense, with R&D expenses being diluted across a larger business. As a result, scaling the R&D allows Cisco to generate higher margins. The table below highlights these differences.

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The comparisons aren't perfect because Cisco's R&D covers a broader portfolio. But spending billions more on R&D while generating a higher margin represents a huge advantage. As a side note, the table also shows the competitive threat Huawei represents, even if the Consumers segment and China represent about 40% and 50%, respectively, of the business.

3. Scaling Its Acquisitions

Cisco's scale is an extra advantage when it comes to acquiring businesses. First of all, Cisco can integrate the acquired technologies and companies across a much larger business. Also, Cisco can scale the sales and marketing of smaller companies by using its existing worldwide sales channels, with limited extra costs. 

And with a net cash position of more than $24 billion, Cisco has no constraint on purchasing multi-billion dollar businesses.

For instance, last year, Cisco acquired the software-based security firm Duo for $3.2 billion. Cisco didn't need to stretch the balance sheet to finance the deal and Cisco integrated the solution to its existing sales channels. But also, the strong authentication Duo offers can be integrated into many Cisco products. The tech giant can repeat this acquisition process as long as the target companies fit into this strategy.

Beyond the Scale Advantages

Of course, successfully transforming its business by diversifying and developing subscription-based software solutions is key for Cisco. Yet, the company still faces the challenges of keeping its competitive advantage in the new growth areas. For instance, Cisco has been losing market shares in the cloud data center segment against Arista (ANET) - Get Free Report . But, with the help of its scale advantage, the company is in a good position to take advantage of the growth opportunities that 5G, IoT, and security represent.

I am long CSCO.