Why Juniper Networks Is Still Struggling With Differentiation

| About: Juniper Networks (JNPR)


Unlike Juniper, Cisco is migrating away from lower-margin hardware like routers and switches.

In a space dominated by better-managed companies like Cisco and Ciena, there are still execution risks in Juniper that can't be ignored.

If the stock should ever fall to, say, $20, then all bets are off. At that point, Juniper is a buy.

To say that network giant Juniper (NYSE:JNPR) has been a relative disappointment would be a gross understatement. The stock closed Friday at $23.27, down 1.15%. Although shares are up 6% on the year-to-date, the stock has shed 15% of its value in the past five years. And it doesn't seem as if management has the right formula to turn the company's fortunes around.

Juniper bulls - many of whom are encouraged by the stock's 6% year-to-date gains - see things another way, especially on the heels of the company having just posted year-over-year growth in both revenue and earnings. In the most recent quarter, Juniper delivered revenue of $1.2 billion, good enough for a 7% jump. Profits, meanwhile, were the real standout, surging 125% to $221.1 million. But let's have some perspective.

The 125% jump in profits shows the depths from which this company has come. We can't expect this trend to continue. For that matter, neither does management, which guided for a weaker third quarter, while citing deal delays. For the October quarter, management guided for revenue in the range of $1.15 billion to $1.20 billion. The high end of that range is still roughly 5% short of what analysts expected.

Still, the reasons for the delays are also the main reason to steer away from the stock. Management talked about telecom/carrier customers that have been engaged in M&A. These include companies like AT&T (NYSE:T) and Verizon (NYSE:VZ) from which Juniper generates more than two-thirds of its revenue.

Recall, AT&T has a $48.5 billion offer on the table for DirecTV (DTV). Likewise, Level 3 Communications (NASDAQ:LVLT) is in talks to acquire TW Telecom (NASDAQ:TWTC). Because of these deals, these companies, on which Juniper relies, are postponing their spending until the deals close. At the same time, however, it does show how overly dependent Juniper is on the telecom sector.

Cisco (NASDAQ:CSCO), meanwhile, does not have such a dependency. This is because Cisco, through several acquisitions, has a more diversified business and considerably more market share within the enterprise. What's more, Cisco has developed a strong software portfolio. Unlike Juniper, Cisco is migrating away from hardware like routers and switches.

Juniper bulls, on the other hand, are arguing that the deal delays that management cited do not suggest lost of market share. That may be so, but it also means that Juniper can't guarantee that they will be closed. Meanwhile Cisco and possibly Ciena (NASDAQ:CIEN) can step in and seize those businesses.

The good news is that Juniper continues to explore ways to grow in other areas like security, which it hopes will offset declining demand in traditional routing and switching. It's also encouraging that new management has placed a focus on profitability and cost management, which should help boost long-term gross margin and profits.

It's also worth noting that the company has posted a profit increase in four consecutive quarters, including a 67% jump in the third quarter. But given the deficits Juniper has had to work with, the main driver of the stock will be the direction the company takes from here.

That said, I can't recommend these shares. In a space dominated by better-managed companies like Cisco and Ciena, there are still execution risks in Juniper that can't be ignored. If the stock should ever fall to, say $20, then all bets are off. At that point, it's a buy.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.

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