Scenarios That Could Impact Juniper’s Stock Price

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JNPR: Juniper Networks logo
JNPR
Juniper Networks

Juniper Networks (NYSE:JNPR) creates networking equipment such as switches and routers used primarily by businesses and Internet Service Providers to route IP data such as emails, videos, files and other digital communication. It is among the four largest suppliers of service provider routers and switches – along with Cisco (NASDAQ:CSCO), Alcatel-Lucent and Huawei – which control over 90% of the global service provider market.

In 2014, the company’s overall sales declined by about 1% year-over-year (y-o-y) to $4.63 billion on account of lower demand from American carriers which resulted in a decline in Routing and Security product sales. Switching was the only division registering growth (13%), while Routing and Security reported a decline of 4% and 18% y-o-y, respectively. To counter declining Security sales, the company stated that it was moving away from point-based solutions towards integrated solutions covering a gamut of problems across switching, routing and security domains. To an extent, this was evident in Q1 2015 when it beat market expectations to report overall sales of $1.07 billion. Although all three product divisions reported sales declines, the company issued a better than expected second quarter guidance on expectations that demand from service providers, cable operators and cloud providers was likely to increase. [1] ((Press Release, Juniper, Jan 27 2015)) [2]

In this note, we take a look at different scenarios which could significantly impact our price estimate for Juniper going forward. Specifically, we will focus on the company’s performance and opportunities in the service provider router market and the global switches market.

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Our $25 price estimate for Juniper is about 10% below the current market price.

See our full analysis of Juniper Networks

Gain In Edge Router Market Share (+10% Upside)

Macroeconomic concerns in the last few years caused project cycles to lengthen and extended delivery timelines from customers. With macroeconomic uncertainty subsiding, service providers have started investing more heavily in their network infrastructure. Moreover, the sustained high demand for data due to the proliferation of mobile devices and high-quality video content on the web has ensured consistent capital spending on networks. This was visible in the first half of last year, when routing sales grew in high-single digits over the prior year period. However, sluggish demand from U.S. carriers in both the core and edge router market resulted in Q3 and Q4 2014 routing sales witnessing declines of about 12% and 15%, respectively. Since service providers account for more than two-thirds of Juniper’s revenues, any weakness in demand reflects significantly on the company’s top line performance.

Management stated that it was very positive on service provider demand in the U.S. improving in the second half of this year, which should help ramp up sales across its divisions, including Routing. The spike in demand is likely to be driven by carriers’ efforts to put their newly licensed wireless spectrum to use. The Federal Communications Commission (FCC) auctioned about 1,600 licenses as part of its AWS-3 auction in January this year, which generated a record breaking $41.3 billion in revenue for the U.S. government. Verizon (NYSE: VZ) and AT&T (NYSE: T) emerged as the top players in the auction with about 70% of the winning bids between the two. Both the wireless majors are Juniper’s clients in the U.S.

Edge routers account for more than 50% of the overall market and about 70% of the service provider router market, according to our estimates. Routers account for about 40% of Juniper’s overall valuation by our estimates, and market share gains in edge routers should be the most accretive to Juniper’s value going forward. Juniper’s edge router market share declined from about 19% in 2010 to an estimated 15.6% in 2014 on account of rising competition from existing companies such as Cisco and Alcatel-Lucent as well as relatively new players such as Huawei. We forecast the company’s edge router market share to decline from its current estimate to 11-12% by the end of our forecast period. However, if Juniper can arrest this decline and maintain its market share on the back of new product launches and its integrated solutions strategy, we could see a 10% upside to the company’s stock price.

Market Share Gains In Switching (+5% Upside)

Juniper’s Switching sales surprisingly declined by 12% y-o-y to $174 million in the fourth quarter, on account of sluggish enterprise demand and lumpiness in the service provider market. The sales decline was surprising because the business division had done well in the first three quarters, registering sales growth of 5%, 25% and 46% in Q3, Q2 and Q1, respectively. Full year 2014 sales grew 13% y-o-y to $721 million, contributing over 21% of overall product revenues.

Going forward, the company is optimistic about ramping up switching sales on account of a number of recent contract wins and its realigned switching strategy with a focus on R&D and developing new products such as the QFX5100 and OCX1100. There are a number of other factors which may help the business improve sales going forward. Firstly, there is growing demand for next generation data center transformation projects, coupled with a need to deliver at a high degree of operational simplicity. Cloud-building is another domain which is driving demand as more and more enterprises look to create scalable virtual networks. Thirdly, the rapid expansion of big data and high-quality video are driving demand for high performance 10GB/40GB Ethernet switches. Another significant driver is the growing need for open architectures and end-to-end automation.

Juniper’s switching business has performed impressively in the last few years, with sales increasing 15% and 12% y-o-y in 2013 and 2012, respectively. Going forward, the introduction of new products and its ability to promote the open converged framework (OCF) concept could help Juniper gain share in the global switching market, which is currently dominated by Cisco. In our current forecast, we expect Juniper’s Switching market share to record a conservative increase of about 10 basis points y-o-y by the end of our forecast period from current estimated levels of about 3.4%. However, if the company expands its market share to about 5% in the same period, we could see a potential upside of over 5% to our price estimate for its stock. ((Cisco maintains 62.2 percent market share in Ethernet switch market, Fierce telecom, Aug 2013))

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Notes:
  1. Press Release, Juniper, April 23 2015 []
  2. Q4 2014 Juniper Earnings Transcript, Seeking Alpha, Jan 27 2015 []