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Wireless-network equipment maker Aruba Networks, Inc. (ARUN) has taken it on the chin recently. The company delivered disappointing third-quarter results and warned of increased competition from its largest competitor -- i.e., Cisco (CSCO). This prompted analysts to revise their estimates significantly lower for both 2013 and 2014, sending the stock to a Zacks Rank No. 5 (Strong Sell). Despite the big sell-off, shares still trade at a significant premium to the industry on a forward P/E basis. Investors should consider avoiding Aruba Networks at least until its earnings momentum turns around.

Aruba Networks is a wireless-network equipment maker. It was founded in 2002 and has a market cap of $1.5 billion.

Earnings Miss

Aruba reported disappointing results for its fiscal 2013 third quarter on May 16. Earnings per share came in at a loss of 9 cents, well below the Zacks Consensus Estimate, which called for a loss of 1 cent. Revenue climbed 12% to $147.1 million, which was also below the consensus of $152.0 million. Its gross profit margin actually improved slightly to 70.1% of total revenue. However, total operating expenses as a percentage of revenue increased 422 points to 71.8%.

Estimates Plummet

Management lowered its Q4 guidance following the Q3 earnings miss. In the conference call, CEO Dominic Orr warned of a "heightened level of competition and bundling strategy from our largest competitor [Cisco]." This prompted earnings analysts to revise their estimates significantly lower for Aruba, both for 2013 and 2014. This sent shares to a Zacks Rank No. 5 (Strong Sell).

The Zacks Consensus Estimate for 2013 is now $0.10, down from $0.23 just 30 days ago. And the 2014 consensus has plunged from $0.48 to $0.14 over the same period. You can see this steep drop in the company's Price and Consensus chart:

The Zacks Industry Rank isn't very bullish for Aruba either. The Wireless Equipment industry ranks in the bottom 17% of all industries that Zacks ranks.

Premium Valuation

Although shares of ARUN are down more than -40% since the company's first-quarter earnings release, the stock still trades at a premium valuation. Shares currently trade at 49x 12-month forward earnings, well ahead of the industry median of 19x.

The Bottom Line

With increased competition from a major tech giant, negative earnings momentum and premium valuation, investors should consider avoiding Aruba Networks for now.

Aruba Networks: Free Stock Analysis Report (email registration required).

Cisco Systems: Free Stock Analysis Report (email registration required).

Source: Bear Of The Day: Aruba Networks