Juniper vs. Cisco: Why Have Shares Taken Separate Paths?

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Includes: CSCO, JNPR
by: YCharts

From the day it shipped its first product back in 1997, Juniper Networks (NYSE:JNPR) has been squared off against its much-larger rival Cisco Systems (NASDAQ:CSCO), and the two companies’ fortunes have been linked.

Both make Internet-infrastructure stuff most investors can barely understand: high-speed data routers and switching equipment, specialized software, data-security systems and a host of other products used by wireless phone and Internet service providers, government agencies and private corporate networks.

In certain Internet Protocol, or IP, markets, Juniper and Cisco are effectively a duopoly, though Cisco – with a $113 billion market cap almost six times the size of its key competitor — has always been the dominant player.

Given their shared exposure to a specialized market, it makes sense that, over the long term, both companies’ shares would move together.

Ever since Cisco jarred investors last month with an unexpectedly downbeat profit forecast, however, the two stock have taken separate paths:

That raises a question. If Cisco shares are getting bludgeoned because it confessed that results are coming under near term pressure, why isn’t Wall Street showing the same disrespect to shares of Cisco’s scrappy smaller rival?

After all, both of them got hurt when the recession caused telephone companies and corporate clients to cut back on their tech spending. And both suppliers are now benefiting from a fledgling rebound in those markets. Both spend a ton of money on R&D as they scramble to stay on top of rapid changes in Internet technology.

Cisco, as the bigger and more mature company, may find growth on a percentage basis gets harder to come by. And critics who say it’s spread itself a bit thin through diversification efforts may have a point. Also, Cisco’s broader product line means it competes in different markets against heavy tech punchers like Hewlett-Packard (NYSE:HPQ) and IBM. But that’s not news.

When Cisco warned last month that earnings were hitting a temporary “air pocket,” it pointed specifically to a dropoff in orders from increasingly cash-strapped government clients. And Cisco is much more exposed to that group than Juniper, which specializes in selling to telecom providers.

Another potential worry? Cisco’s fiscal-year arrangement means the tech giant reports quarterly results on a different schedule. (The quarter it recently reported ended October 31, for example.) As a result, its results occasionally are the first to reflect the impact of a trend starting to take hold in the tech sector. If that’s true, then the split in revenue-growth trends we see here is temporary, and Juniper’s sales are likely to soften as well.

But still. Cisco, huge and stable enough over the long term that it was selected last year to be one of the thirty Dow Industrial components, the one that enjoys the mammoth economies of scale, valuable brand recognition, and longterm relationships with a stable of big clients, punished by investors to this extent while Juniper gets a pass?

YCharts doesn’t think so. It considers Juniper shares to be fairly priced, maybe even just a tiny bit rich. And it also says that Cisco shares, in the wake of the high-volume selloff, are significantly underpriced.

That makes sense. Near-term economic issues may cause turbulence, but the rise of the smartphone and other trends promise long term growth in networking, and profits for both Juniper and Cisco.

With the two stocks moving apart, somebody’s wrong: either Juniper’s overpriced, or Cisco is cheap.

We say: Cisco is cheap.

Disclosure: none