Juniper's Big Problem Begins To Show

| About: Juniper Networks (JNPR)


JNPR revised its outlook lower on Monday afternoon, and its stock fell 6% in response.

The reason for Juniper's struggle is consolidation within the industry.

The outlook is only going to get worse for JNPR.

Juniper (NYSE:JNPR) shares dropped 6% yesterday in afterhours trading, but they should be trading with much bigger losses. The company issued a first quarter earnings warning that represents a slight decline from previous guidance. As a result of this slight reduction in guidance, the market does not seem to be taking the warning all that serious, or is buying the company's excuse at the very least.

However, this warning follows weak guidance the company had already issued three months prior. And more importantly, the ongoing weakness and Juniper's inability to issue low enough guidance on a quarter-to-quarter basis represents a much larger issue that is sure to push JNPR stock lower quarter-after-quarter.

Here's the big problem

Juniper creates almost $5 billion in annual revenue, almost entirely from routers and switches. These are products that make broadband and mobile networks efficient, regarding connectivity and reliability. While $5 billion in revenue makes JNPR a very large company, its scale is small relative to Alcatel-Lucent (ALU) and Cisco (NASDAQ:CSCO). Both are Juniper's larger competitors, of whom are consolidating with other telecom equipment juggernauts.

Therein lies the problem for JNPR, clear as day to see. Nokia (NYSE:NOK) acquired Alcatel-Lucent and Cisco has partnered with Ericsson (NASDAQ:ERIC) in response to Nokia's purchase. In the past, the telecom equipment market was far more fragmented. Yes, there were certain market leaders like Cisco and Nokia. However, one group like Nokia/Ericsson construct base stations and towers whereas the others like Alcatel-Lucent, Cisco, and Juniper develop the products like routers and switches that improve a network's reach, connectivity, performance, etc. That said, the two groups are now consolidating, cross-selling between customers, and Juniper is the only one of these large companies that's left out.

Prior to Nokia's acquisition of Alcatel-Lucent, Nokia essentially sold all Juniper products to customers in need of IP routing/switching services. Now that Nokia has Alcatel-Lucent, and a far superior line of edge and core routers, my guess is that Nokia won't be pushing Juniper products anymore. When you add the cross-selling opportunities of forming these massive partnerships to the equation, JNPR is really left on a small island to itself.

With that said, even the most bullish JNPR investors will acknowledge that the company's growth outlook has diminished. However, those same investors point to the company's valuation, a stock trading at less than 11x FY2017 EPS and high operating margins near 19% as a reason to own Juniper stock. In other words, Juniper is a cheap cash cow, supposedly.

However, those arguments aren't all that relevant. For example, Juniper's EPS expectations for 2016 have been revised lower from $2.21 to $2.14 over the last 90 days. After its most recent warning, those revisions are certain to drop even lower. The point is that JNPR stock is unlikely trading at just 11x FY2017 EPS, and the reason is because it is unlikely to earn $2.30 per share in 2017.

As the two juggernaut telecom equipment partnerships start to ramp up their marketing and sales efforts, Juniper will continue to face the competitive troubles that have led to two downbeat revisions to guidance in the last three months. In fact, JNPR's struggles are likely to intensify, with Nokia/Alcatel-Lucent and Cisco/Ericsson still very much in the infancy of their respective operating plans.

The bottom line is that Juniper will likely face ongoing struggles, and that makes JNPR stock uninvestable at this point in time. Sure, JNPR may look cheap right now, but Juniper can not offer its customers a unified, end-to-end solution like Cisco or Nokia, and that hurts JNPR long-term. It suggests that Juniper will go the route of product discounting, and will face an uphill sales battle moving forward. And while this suggestion is certainly speculative, it is also a logical scenario backed by two consecutive quarters of bearish guidance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.