Juniper Positioned for Market Share Gains, but Stock Still Overvalued

December 29th, 2010 by Trefis Team
-5.55%
Downside
35.20
Market
33.25
Trefis
JNPR: Juniper Networks logo
JNPR
Juniper Networks

Juniper (NYSE:JNPR) competes with Cisco (NASDAQ:CSCO) and Alcatel-Lucent (NYSE:ALU) in the networking equipment market. We currently have a Trefis price estimate of close to $27 for Juniper’s stock. Our estimate is about 28% below the current market price, which has risen significantly over the past 3 months.

Could investors be betting on Juniper’s expected success with its push into cloud computing and mobile internet?

Project Stratus – Cloud Computing

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In Juniper’s own words, Project Stratus is “an initiative to create a single data center fabric that will deliver a quantum jump in scale, performance and simplicity, with the flexibility to support fully converged and virtualized data center environments”. [1] In simpler words Juniper is trying to create a virtual computing environment that offers greater capacity to serve various computing needs, in addition to more speed, reliability and security.

Juniper will likely release several switches and routers to support its initiative in 2011 and challenge market leaders like Cisco. Juniper has also partnered with IBM (NYSE:IBM) in this regard. Cloud computing is gaining steam and it is forecasted that the mobile cloud computing market alone will amount to nearly $9.5 billion by 2014, compared to just $400 million in 2009. [2] If Juniper is successful with Project Stratus, it could generate upside to our forecasted market share in routers and switches.

Juniper is pushing further into the mobile internet market, which will likely be one of the important growth drivers going forward if current trends continue.

Higher Share in Routers and Switches Can Lift our Price Estimate

We estimate that routers and switches constitute about 35% and 18%, respectively, to Juniper’s stock value. While Juniper has been able to gain decent market share in routers, it still lags well behind Cisco in switches.

Juniper has only 4.5% market share in bottom layer switches compared to an estimated 27% in core routers and 15% in edge routers. Juniper has room to expand in the bottom layer switch market, which is estimated to be twice the size of the core and edge routers markets combined. The relative size of the bottom layer switch market means that small increases in market share can have a large impact on valuation. However, this upside alone is still unlikely to raise our valuation estimate towards Juniper’s current stock price near $37.

Drag the trend-line in the chart below to see how various bottom layer switch market share scenarios affect Juniper’s stock value.

You can see the complete $26.87 Trefis price estimate for Juniper’s stock here.

Notes:
  1. Juniper Networks Press Release, February 2009 [↩]
  2. Mobile Cloud Computing: $9.5 Billion by 2014, readwriteweb.com, Feb 23 2010 [↩]