One of the key fundamentals of investing is that sometimes you must wait for a stock to fall dramatically in price before you can buy When that fall occurs, a stock often becomes simply too cheap to pass up. We have found a stock that has become too cheap.
Juniper Networks (JNPR) is a leading networking company, the second largest after Cisco (CSCO). Juniper's products can be found all over the world, in a variety of industries. The company has seen much success, despite its perennial status as #2 to Cisco. But lately the stock has tumbled over mounting concerns about pricing, competition, and demand. Over the past year, the stock has dropped by over 35%, outdoing both the S&P 500 and Cisco to the downside. We think that the stock has been dramatically oversold, and we would be buyers at this level.
The long-term thesis for Juniper remains as intact as ever. Exponential growth in internet traffic and the build-out of cloud computing will help Juniper sustain its momentum going forward. On the conference call, CFO Robyn Denholm stated:
The underlying fundamentals of our business remain healthy, and we are focused on executing our strategy to address the market trends of mobile Internet and cloud computing. In the coming year, we expect to drive the deployment of our innovative portfolio of new products. Looking at the demand metrics for the quarter, book-to-bill of 1.2 reflects healthy demand for our products. We ended the quarter with strong product backlog, driven primarily by router orders. Total deferred revenue was $886 million, up $101 million year-over-year. Deferred revenue declined sequentially by $44 million. This included a $29 million decrease in deferred services revenue due to typical seasonality for service contract renewals and a $15 million decrease in product deferrals related to delivery of committed features.
We would like to highlight the strong book-to-bill ratio this quarter. The decline in deferred revenue should not worry investors, as Juniper does not recognize revenue from features requested by its customers, even if the actual product itself has been delivered. We think this should soothe investors' nerves over near-term macro-economic issues. On the call, analysts were looking for signs of weakness in Juniper's earnings and guidance, as Wall Street is seemingly paralyzed by the notion that events in Europe and the domestic economy dictate the results and guidance of every company. Analysts questioned if Juniper had seen order cancellations or push-outs, as that would be a concrete sign of end-market weakness. CFO Robyn Denholm stated that "In terms of order cancellations and push outs of existing orders, we have not seen that activity. There may have been a small amount of it, but nothing unusual in terms of either canceled orders or any existing orders pushed out.
Juniper is investing for the long-term, and we think it is a stock for the long term as well, for the following reasons:
- Valuation: Juniper now sells for less that 14 times forward earnings, compared to a historical average of 23, despite having the strongest product line-up in its history. We think that the multiple does not reflect the company's growth rate.
- The monopoly effect: Customers do not want to put all their eggs into one basket, the basket being Cisco. Customers at the very least need Juniper so that Cisco does not raise prices on its own products. This is very similar to the Intel-AMD (INTC),(AMD) dynamic, with one key difference. AMD's products pale in comparison to Intel's, while Juniper's are just as good, if not better than Cisco's.
- QFabric: Juniper's new networking and data initiative, QFabric, is seeing design wins and great response from early adopters, including Thomson Reuters, Bell Canada, and Deutsche Borse. QFabric should help Juniper keep its leading position in the networking space.
- Outstanding balance sheet: Juniper has $3.2 billion in net cash, which works out to $6 per share in cash, or close to 20% of its market cap. Juniper's valuation becomes even more compelling if you back out the cash.
We think that the downside in Juniper is overdone, and that the worst case scenario has been priced in. While there may be some short-term volatility, we think that in the long run, Juniper will outperform. The company's end-markets are growing, and it is poised to reap the benefits of the secular changes occurring in the internet and communications industry. Analysts agree, with the Reuters average price target currently at $25.72, representing upside of over 25%. Juniper is connecting the world, and at this price, we think investors would be wise to connect with Juniper stock.