Juniper’s Outlook Is Strong Despite Near-Term Economic Pressures

A year ago Juniper Networks (NYSE:JNPR) was trading at over $40 levels with the stock touching a 10-year high of $44 in March 2011, as the overall improvement in economic conditions saw carriers and enterprises spend heavily on network infrastructure and Juniper’s earnings received a boost as well.

However, concerns over the global economic growth have resurfaced since then as the sovereign debt crisis emerged in Europe and debt levels in the U.S. touched alarming levels. Consequently, Juniper’s results have taken a beating. And with the management lowering its outlook for the coming quarters, the stock has almost halved and is hovering at around $20 levels now.

Juniper’s competitor Alcatel-Lucent (NYSE:ALU) has also slumped in the wake of concerns over the macro environment. However, the networking market leader Cisco (NASDAQ:CSCO) is doing slightly better than its competitors.

We have a price estimate of $28.79 for Juniper Networks’ stock, which is around 25% ahead of the current market price. Let’s take a look at why Juniper looks oversold at its current price.

See our full analysis of Juniper Networks

Juniper’s Revenue Growth May Slow Down But Not for Long

As the macro environment remains challenging, we expect Juniper’s customers will continue to remain cautious in their capital spending. However, this will only result in lengthening of project cycles and extending of delivery timelines from customers, and this means higher revenues as economic conditions stabilize over the next few years.

Besides, since the broader market continues to be strong driven by two key trends of mobile Internet and cloud computing, we can expect higher demand for Juniper’s products and services as mobile devices such as smartphones, e-readers and tablets proliferate.

In addition, Juniper expects to have an extended products and solutions portfolio in 2012, thanks to its increased investment in R&D over the past three years. This will help the company cater better to the fast-changing marketplace and boost its revenues.

Juniper’s Expenses Rise Only to Boost Demand

In addition to moderate revenue growth, Juniper’s product gross margins declined by 130 basis points to about 68% in 2011. This was due to relatively lower volumes for its routing business, which accounts for about 40% of the company’s value by our estimates. Services gross margins also fell by 300 basis points over the previous year to 55% in 2011.

Meanwhile, Juniper’s operating expenses increased in 2011, primarily as the company maintained a high level of investment in R&D to equip itself with a portfolio of new products that can better help it tide over the ongoing economic concerns. This will have an even greater impact when the global economic conditions improve.

We expect the company’s operating expenses to remain high, going forward, as Juniper continues to invest in R&D to come up with new and innovative products such as its revamped edge switch line as well as the QFabric family of products, in order to win clients in a fast-changing environment. We also expect these new products to improve the firm’s overall product mix, providing support for its declining product gross margins as a result.

Thus, while a weak near-term scenario may have led to market correction in Juniper’s stock price, when we factor in the strong long-term outlook for the networking market in our model for Juniper, the stock looks over sold.

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