Juniper (NYSE:JNPR) recently entered into a strategic agreement with wireless LAN (WLAN) provider Aruba Networks (NASDAQ:ARUN) to deliver integrated wired and wireless network solutions. In a bid to enhance product innovation for solving complex enterprise problems, both companies agreed to collaborate not only at the product development stage, but also in taking products to the market by leveraging their client relationships and reseller networks. Thus, this is much more than a typical OEM (Original Equipment Manufacturer) deal, with Juniper contributing its expertise in wired infrastructure (enterprise switches and routers) and Aruba providing its wireless mobility solutions.
Per the terms of the deal, Juniper will enable Aruba to utilize its programmable application-specific integrated circuits (ASICs) and application programming interfaces (APIs) along with its proprietary software to achieve its goal of developing smart and innovative solutions for enterprise networking. The deal is likely to help Juniper expand it’s WLAN business and also offer flexibility to customers in deploying best-of-breed network solutions. The agreement also marks Juniper’s first partnership in its vision for an open converged framework (OCF). However, it will be interesting to see how the company manages its Trapeze WLAN business going forward, which it acquired for $152 million in 2010.
We have a price estimate of $28 for Juniper, implying a premium of over 10% to the current market price.
Need For Converged Networks
Until recently, Wi-Fi networks were not an essential part of the enterprise environment because users rarely had more than one wireless device. However, the rapid proliferation of wireless devices in recent years has impacted the work environment as well as people’s work habits, making Wi-Fi an absolute necessity in the office space. The mobile device market, including notebook PCs, tablets and smartphones, is expected to reach close to 2.6 billion units by 2016, according to research firm Canalys.
Owing to the massive expansion in mobile device usage and their growing prevalence at the workplace, there is a need for constant innovation to upgrade network controllers for efficient and hassle-free flow of wireless traffic. This is where Juniper’s open converged framework (OCF) gains prominence. With its integrated network approach, enterprises are likely to experience better productivity with wider security coverage -for fixed as well as mobile devices. Companies are also likely to save on costs because they would no longer be bound to particular network infrastructure vendors, which will allow them to make choices based on various criteria including quality and price.
WLAN Business Expansion Likely To Boost Switching Sales
Although Aruba will be the expert Wi-Fi provider in this newly formed partnership, Juniper’s WLAN business could also get a boost as the company integrates the business with its other offerings such as enterprise security and intelligent routing solutions. It could also benefit from a potential rise in acceptance of Juniper’s OCF in the market. Juniper acquired Wi-Fi vendor Trapeze in 2010 to give a boost to its WLAN business and compete with heavyweights such as HP Networking (NYSE:HPQ) and Cisco (NASDAQ:CSCO).
WLAN is included in the company’s Switching division, which contributes over 15% of its valuation, according to our estimates. Juniper’s switching business has performed impressively in the last few years, with sales increasing 15% and 12% year-over-year in 2013 and 2012, respectively. In the first quarter this year, sales grew by a whopping 46% over the prior year quarter driven by new product launches in the EX line of ethernet switches and strong demand for QFabric products. Going forward, the introduction of new products and its ability to promote the OCF concept could help Juniper gain share in the global switching market, which is currently dominated by Cisco. If the company can expand its market share from an estimated 3.2% in 2013 to about 6% by 2020, we could see a potential upside of about 7% to our price estimate for its stock.
Disclosure: No Positions