Aruba Networks (ARUN) is a California-based company that produces networking solutions primarily for the enterprise market. The company mainly sells Wireless Local Area Networking [WLAN] as well as Edge Access networking equipment, which include access points and mobility controllers. The company also sells network management software that primarily runs on the equipment it sells to enterprises.
Aruba Networks, after going public in 2007, has seen a number of financial seasons, both good and bad. At the onset, it started off with a healthy share price of around $14 in 2007, coming down to a low of almost $2 per share in November 2008, and reaching a peak of $36 per share in April 2011. The company's stock price has been downhill ever since, experiencing periods of little highs in between. In 2011, the company was ranked as second in terms of market share in the WLAN market.
Aruba Networks in the market today
Aruba Networks' shares closed at a price of $16.99 per share, experiencing a gain of 2.29% from an opening share price of $16.79 in the morning. The stock is currently trading at 19.09x of its annual future earnings projected for next year, with a current market capitalization of $1.94 billion. The current stock valuation suggests that the stock is overvalued and investors have tied greater expectations to the company. Whether their expectations are justified or inflated is what would enable us to judge whether the company's stock would actually appreciate or plummet in the days to come.
Aruba Networks has been showing unsatisfactory performance over the past two years. It has been reporting negative earnings in the previous two fiscal years (FY12 and FY13) that have resulted in reduced investor confidence in the company. Reduced confidence in the company's performance was followed by a decline in its share price from an all time high in 2011, which was the year it reported a profit in, following a loss in 2010. However, non-GAAP earnings show a profit and thus shows that the company's losses are only skin deep and it could recover if due attention is given to the problems at the base.
However, the company's revenues experienced a growth of 6.76% year-over-year in the fourth quarter of the year ending July 2013, beating its revenue expectations at the same time. Its earnings per share have reduced to $0.12 from $0.18 year-over-year in the fourth quarter, however beating its EPS estimated for the quarter as well.
The Wireless LAN market is expected to grow by double digits in the years to come, and Aruba Networks could greatly benefit from the growing industry if it finds a way to curb the problems it is currently facing. According to many analysts, the company has a potential to put itself second to the market leader Cisco in terms of market share.
Demand for WLAN products is ever-increasing pertaining to the multitude and a growing number of WLAN-based devices in the market. The growth of the mobile industry, especially the smartphone and tablet industry has increased the end user's need for the omnipresence of wireless Internet, and thus a demand for WLAN devices is on the rise. Aruba Networks could therefore greatly benefit from the growing smartphone and handheld industry.
The recent underperformance of Aruba Networks could to a great extent be attributed to fierce competition by both the low end and high end companies in the industry. Cisco (CSCO) has been giving Aruba Networks a hard time competing in the high end segment of the market. Cisco's bundling services has helped it secure wins that Aruba has not been able to due to the customers giving higher value to Cisco's products in the market, and consequently Aruba Networks has been under immense pressure from Cisco in the near past, and the trend is expected to continue unless Aruba Networks modifies its marketing strategy to ground its products and services strongly against Cisco.
At the lower end of the market, Cisco has been squeezed by Ubiquiti Networks (UBNT) that provides Wireless LAN products and services to the enterprise market at prices much lower than that offered by Aruba Networks. Ubiquiti's pricing strategy is a primary reason for the company's quick gain of market share over the past. Customers at the lower end of the market thus prefer Ubiquiti to Aruba Networks since it offers the same products as Aruba Networks but at a much lower price, and without the extras that Aruba offers with the products. Ubiquiti Networks is thus gaining significantly in the price-sensitive segment of the market as well as the market segment that does not require the use of advanced products offered by Aruba.
Aruba Networks has thus suffered much at the hands of a competition that it has been unable to tackle prudently so far. In order to avoid continuing losing the market to its competition, Aruba would need to revise its business model, and dedicate much attention and finances to marketing in order to pitch its products better in the market. It needs to read the market and employ marketing strategies that would better enable it to capture both the low and high end of the WLAN market as well as offering products that better suit the needs of the customers at all levels.
The company spends large amounts on R&D, and thus using the same finances, the company should aim at offering new products that better suit the needs of the customers as well as that comply with the changing trends in the industry.
Aruba Networks is going through a tough period currently, and thus its stock is underperforming likewise. The company would need to make drastic changes to its marketing strategies as well as the way the company is run, since it needs to cut down costs to a decent level. At present, Aruba has not shown much sign of any such initiative, which would mean that even though its revenues and EPS might be improving, the underlying problems causing the company's downhill roll have not been resolved. It would thus be prudent to avoid investing in the stock at present, until the company shows some signs of improvement for the longer run.