Is Juniper Networks A Buy After Its Big Fall? (JNPR)

"Slash" submits: Juniper Networks (JNPR), as we all know by now, missed consensus estimates for the first time in the last two years, resulting in a 21% hair-cut to the company's market cap. JNPR has been plagued by acquisitionmania, acquiring five companies in the last two years starting with NetScreen and ending most recently with Funk Software. Recent acquisitions of Redline, Kagoor and Peribit contribued no growth during the quarter. Think about that: Juniper paid over $450 million for no growth. Talk about dilution!

F5 Networks (FFIV), a competitor of Redline, saw its traffic management business grow 13% in the December quarter. The security business had the most dismal quarter since acquisition in what was the strongest quarter historically for NSCN. Clearly, there is a serious flaw in Juniper's strategy when it comes to playing in the enterprise market. These acquisitions have resulted in a bloated operating structure on top of the additional heads hired for the "J-Series" platform. With all the additional operating expenses and missing revenue contribution, the operating leverage has disappeared.

But are things really so gloomy? All this increase in headcount will start to pay off as the new platforms are rolled out. And with the majority of hiring already behind us, operating leverage will kick in (I know this could be wishful thinking).

JNPR had continued to do well in its core routing business while the acquisitions have been struggling. But the final shoe on the routing side dropped in the December quarter, as deployment delays in Japan caught up with the company. JNPR does not anticipate a pick up in deployments in Japan anytime soon.

What might save the company is this -- new deployments in the US continue to be strong, and a few large customers are yet to show up on the revenue line including one large Internet search company and one wireless carrier. But JNPR's position in the routing world is starting to waver as carriers start to look at other vendors to beef up their routing/aggregation capabilities on the edge of the network. One only needs to look at results from TLAB and RBAK for affirmation of this fact.

With the stock down 37% from recent high of $27.12 (July 21 2005) are the risks factored into the valuation? I can't write like Wall Street's Finest but I believe that JNPR certainly has plenty of challenges ahead for Q1 and possibly Q2. Also, JNPR could stay infected with acquisitionmania and acquire more companies to hide all the troubles its had with past acquisitions. But things could turn around after Q1.

Unless you are a quick-shooting hedgie and need exposure to a serious contender in the telecom equipment market that successfully took on the mothership CSCO and can hold a position for more than a quarter, then it's worth doing your due diligence on JNPR at current levels. (Yes, as they say "the chart is broken", but I don't preach O'Neil's methodology here).

JNPR 1-yr chart:

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