With Wall Street producing numbers reminiscent of the late 90's tech bubble, there is now renewed optimism that technology spending has also returned. When IT budgets start to increase, very few companies beyond those directly involved in networking are more deserving of those dollars. After all, they are the ones that provide the backbone that manages your enterprise data traffic - essentially they're blood veins of the operation. But one thing investors have to realize when making investment decisions is that not all networking firms are the same.
In other words, there are strengths and weaknesses with each one. Some grow faster than others such as F5 (FFIV) and there are those that are more mature and pay decent dividends such as Cisco (CSCO) and Hewlett Packard (HPQ). But regardless of your preference, there is no denying that investing in technology or specifically one of the following stocks mentioned may certainly be one of the best decisions you're likely to make. But as with anything else, it is important that you do your own due diligence and consider your risk tolerance and investment horizon.
F5 is one company that always seems as if it has its act together. The stock is by far the most expensive among the group from a valuation standpoint as well as by virtue of its P/E ratio. There are high growth expectations placed on this company, but remarkably it has yet to give investors a reason to doubt that they can be reached.
The company recently reported fiscal first quarter earnings and both its results as well as guidance were in the range that made analysts happy. The company reported a 2% increase in revenue from the prior quarter while netting an increase of 20% from the previous year. Product revenue was somewhat of a minor disappointment while software revenue climbed 7%.
Clearly management knows what it is doing, investors are happy and analysts are ecstatic. So what is the problem? Well for starters and as mentioned above, the stock continues to be a tough one to figure out. What is its true value and what makes the company worthy of such an enormous P/E? As well as the company is performing and has been performing, it is hard to recommend the stock at these levels.
On Wednesday, the company reported net income of $1.47 billion, or 73 cents per share, in the three months that ended January 31. This didn't compare too well with its net income of $2.6 billion or $1.17 per share in the year ago period. Adjusted for one-time items, the company earned 92 cents per share, above the 87 cents expected by analysts surveyed by FactSet. Revenue was $30 billion, down from $32.3 billion and slightly below expectations of $30.7 billion.
The revenue drop was even steeper, 8%, when taking out the effect of changes in currency exchange rates. It was the fastest revenue decline for the company since the recession hit 2009 results. As with Dell and Microsoft (MSFT), HP blamed flooding in Thailand for more than half of its revenue drop. The floods last year disrupted manufacturing of storage drives, a key component in PCs. HP said it decided to divert resources to higher-margin products, but it didn't do as well as it expected due to ongoing operational problems.
I continue to remain bullish on the company and think that there is yet 20% upside to be had for value investors. The company is taking a new strategic direction - one that I think makes perfect sense. But investors must not make the mistake of expecting an immediate turnaround. This is going to take some time to realize. As bad as things once looked for this company with its indecision regarding its PCs and tablet initiatives, investors should be comfortable in its new leadership yet appreciate that the old HP might be coming back.
For Juniper, the important question continues to surround the overall health of its business. It is interesting when you consider that previously, the debate has always been which of the two is better when compared to Cisco . Now analysts are asking if it can run its business effectively. In January, the company announced that fourth quarter results were going to fall short of Wall Street expectations.
The company guided revenue down to $1.11 billion and 26 cents per share instead of the $1.19 billion and 34 cents that analysts had been expecting. The unfortunate thing for Juniper was that this was to log the third consecutive quarter of shareholder disappointment. The company added that weak U.S. demand and unexpected slow growth contributed to the decline in sales while at the same time suggesting that it had a "record year" in 2011.
The good thing is that by pre-announcing the softer numbers, the company did accomplish its goals of making a soft landing when the actual numbers were released. As it warned, net revenue for the fourth quarter of 2011 decreased 6% on a year-over-year basis, and increased 1% sequentially, to $1,120.8 million. For the year ended December 31, 2011, its revenue increased 9% on a year-over-year basis to $4,448.7 million while posting a GAAP net income of $96.2 million, or $0.18 per diluted share. All in all, the numbers were decent, not the disaster that they were projected to be. But it begs the question, does management truly have a grasp on the company if it has missed for three straight quarters?
There is cause for optimism however. The company has an array of new products coming out as it continues to position itself to steal share from the rest of the group. One of these products is called the EX6200 and according to the current reviews, it has the potential to be a game-changer for the company by bringing together various intelligent features into one. As great as that product can potentially be, Juniper's challenge will continue to be finding ways to grow and creating the sort of momentum needed by tech companies to inspire investors to believe. I suppose it really has three challenges.