Widening Margins Spell Upside for Juniper

Juniper (NYSE:JNPR), which competes with Cisco (NASDAQ:CSCO) in the Internet infrastructure market, recently reported its earnings for the second quarter of 2010.

Gross margins improved during the quarter, driven by strong sales of Juniper’s high-end routers, mobile security products and software.

Based on these trends, we have updated our price estimate for Juniper’s stock from $23.35 to $25.15. We expect gross margins to stay at current levels. However, additional margin improvement could boost the stock by 2% to 3%. Our analysis follows below.

Climbing the value chain

Juniper’s margins have widened as the company positions itself less as a hardware vendor and more as a service that helps enterprise customers solve complex networking problems. Juniper’s high-end MX 3D routers have sold strongly in recent months. So has Mobile Secure, Juniper’s security platform for wireless service providers. The company’s software business has also done well, led by applications such as Media Flow, Falcon, Junos Space and Junos Pulse.

You can drag the trend-line in the chart below to create your own gross margin estimate for Juniper and see how it impacts the company’s stock price.

Could margins improve?

The rapid expansion of mobile networks  will likely ensure that demand for Juniper’s mobile security products stays strong. Juniper’s software business boasts high margins but accounts for a relatively small percentage of revenues. However, Juniper seems determined to complement its systems business with software. As the software business grows, it could help Juniper  expand its margins even more.

In this scenario we could see gross margins improving by nearly 2% by the end of the Trefis forecast period,  yielding an upside of 2% to 3% for Juniper’s stock price.

You can see the complete $25.15 Trefis price estimate for Juniper’s stock here