Juniper (NYSE:JNPR) recently reported strong sales of its network switch hardware. The company has less than 6% market share within the network switch market where it competes with market share leader Cisco (NASDAQ:CSCO). We expect Juniper’s network switch share to continue to grow and have updated our price estimate for Juniper from $21.61 to $22.29 based on the positive trends evident in its earnings release.
Below we highlight why the network switch business is significant for Juniper and how the company’s network switch market share impacts the stock.
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Network Switches 20% of Juniper’s Stock
We estimate that Network Switches constitute about 20% of Juniper’s stock price compared to about 26% for Juniper’s primary rival Cisco. Both Juniper and Cisco make networking equipment like switches and routers which are sold to businesses to route IP data such as emails, videos, files and other digital communication.
Network switches are used to manage data flow within a small network such as the internal network of a company. In comparison, routers manage data flow between separate networks and route traffic through the internet.
Two Types of Network Switches
Juniper offers two kinds of network switches: bottom layer switches and top layer switches. Bottom layer switches are more common and are used in almost all networks. We estimate that Juniper will earn more than $700 million in revenues in 2010 from bottom layer switches compared to only about $100 million from top layer switches.
Growing Bottom Layer Switch Market Share
Within the bottom layer switch market, Juniper has only 4.5% market share compared with Cisco’s 60% share. We expect Juniper’s bottom layer switch market share to reach nearly 6% by the end of Trefis forecast period. We believe Juniper’s partnership with IBM will help it to reach more customers and increase share.
Growing Top Layer Switch Market Share
Top layer switches are advanced switches that are used for balancing server load and are generally used in higher layers of networks. Currently, in the top layer switch market, Juniper holds 4.5% market share compared to Cisco’s 44% share.
We expect Juniper’s top layer switch market share to exceed 5% by the end of Trefis forecast period.
Important Source of Growth for Juniper
Though challenged by Cisco’s commanding presence, the network switch business will continue to play a crucial role in Juniper’s future growth for the following reasons:
(i) Large addressable market of about $17 billion compared to $12 billion for routers (as of 2009)
(ii) Top layer switch market is growing fast and is expected to continue to grow at a rate of above 10%
(iii) Small share of Juniper means significant expansion opportunities given the right strategy and continuous innovation
You can modify the forecast charts above to see how much Juniper’s stock would be impacted by a few percentage points increase in market share.