How hot is the space? Consider that Contrail was founded just this year and its chief technology officer, Kareeti Kompella, had jumped there from Juniper itself just three months ago. Then consider that this follows Cisco's (NASDAQ:CSCO) purchase of Cariden just two weeks ago, and the purchase by VMware (NYSE:VMW) of Nicira just a few months ago.
So what is a software defined network? Put simply it moves network control from the switches themselves to software, to a single console. More important, it allows for the elimination of switches and their replacement by a switching fabric combining hardware and software. Thus it's sometimes called a "Cisco killer."
The key technology for all this is OpenFlow, a "forwarding instruction set" that enables remote control of networking equipment. All the purchased companies support OpenFlow, and Nicira is the company that brought it to market. OpenFlow components are open source under the Apache license , which allows for proprietary extensions.
It's for this reason that you need to be a little careful buying into networking stocks based on the OpenFlow hype. The benefits of open source tend to move toward customers over time, rather than vendors. For enterprises, educating engineers about OpenFlow, and getting them involved with the code base, is a far more cost-effective solution to networking automation than, say, buying a bunch of switches.
As support for OpenFlow becomes standardized across the networking space, then, I expect a lot of the benefits to flow more to companies that actually run networks, rather than the vendors. This is great for Google (NASDAQ:GOOG), great for Amazon (NASDAQ:AMZN), great for companies like Rackspace (NYSE:RAX) that are building open source clouds.
Over the next six months you might see some lift in JNPR, CSCO and VMW based on OpenFlow hype, and these transactions. But I don't expect a lasting lift. Over time networks are becoming software, just as storage is becoming software and data centers are becoming software in the form of clouds. If you're looking at a long-term time horizon, in other words, you may want to avoid these names, and if you are in them, look for yield rather than price appreciation.