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Investment Overview for Juniper (NYSE:JNPR)
Below are key drivers of Juniper's value that present opportunities for upside or downside to the current Trefis price estimate for Juniper:
Edge Router Market Share: We forecast Juniper's share in edge router market to decrease from an estimated 15.2% in 2015 to 12.5% by the end of our forecast period. However, there could be an upside of more than 8% to our price estimate if Juniper were to stabilize its share at 15.5% by end of our forecast period. Juniper will look to build on the continued success of its SDN enabled MX routers and PTX and ATX series in order to do achieve this. On the other hand, there could be a minor downside of 4% if the market share were to decrease to around 10%. Fierce competition from bigger players Cisco and Huawei can challenge Juniper, which is focusing more on software.
Enterprise Router Market Share: We forecast Juniper's share in enterprise router market to fall from an estimated 7% in 2015 to about 6% by the end of our forecast period. Given its low share in this segment, Juniper has tremendous scope for improvement. There could be a potential upside of about 10% to our price estimate if Juniper could increase its share to 25% by end of our forecast period. Towards the end of 2015, Juniper dissaggregated its Junos network operating system from its hardware in order to make it available for white-box products. This move is expected to bring in more enterprise customers, who will be able to use Junos on third-party hardware and third-party applications on Juniper’s hardware, in addition to Junos on the company’s proprietary hardware.
Juniper Switches Market Share: This segment presents a tremendous upside opportunity for Juniper over our current price estimate. The market size for the bottom layer switches is more than the combined size for routers (core, enterprise and edge) at an estimated $20 billion for 2015. Juniper currently has a low share here, at an estimated 3.4% for the year 2015. We currently forecast this share to increase to about 4% by end of our forecast period. However, there could be a potential upside of about 20% to our current price estimate if Juniper was to increase this share to 9% instead, by end of our forecast period. The company has been successfully pushing into the switching market with its EX series switches. Also, with software defined networking gaining steam, virtual switches can help Juniper improve its share in the market. On the flip side, if share stagnates around current levels, there could be a downside of about 6% to out price estimate for Juniper.
For additional details, select a driver above or select a division from the interactive Trefis split for Juniper at the top of the page.
Juniper Networks 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. For example, an email that you send to a distant friend travels through various switches and routers made by companies like Juniper, Cisco and Alcatel-Lucent along the path to its destination.
Edge Routers, along with Core Routers, are used by Internet Service Providers to route data traffic from network to network. Juniper's share of the Edge Router market has declined from ~18% in 2011 to an estimated 15.2% in 2015. The edge router market is almost two a half times the core router market and bigger than even the enterprise router market. We believe the Edge Router market will increase from around $8.2 billion in 2015 to become a $10 billion market by the end of our forecast period.
The ~$21 billion market for switches (2015) is almost 50% bigger than the corresponding router market. Juniper has been able to almost quadruple its switches market share from less than 1% in 2008 to an estimated 3.4% in 2015. However, due to Cisco's entrenched position in the switching market, we do not believe Juniper will attain more than 4% market share in this space. Of the various kind of switches, bottom layer switches are the most prevalent types of switches found within networks and account for more than 90% of our market size estimates.
In addition to networking hardware, Juniper provides maintenance and support services to its customers to help them fix problems that occur with networking equipment. Juniper's network service revenues and profits are dependent on the installed base of Juniper switch and router equipment in use.
Juniper also provides its customers with security solutions that help protect networks from outside attacks. Network security equipment includes products such as Virtual Private Networks (VPNs) and firewalls. Juniper faces competition from the likes of Cisco, CheckPoint and IBM. With software defined networking gaining steam, security has become a major concern for customers given the involvement of white label hardware.
Escalating Mobile Data Traffic Driving Router and Switch Sales
A study released by Cisco (Juniper's primary competitor) in early 2016 estimated that global mobile data traffic grew 74% in 2015, with 4G traffic exceeding 3G traffic for the first time. Going forward, Cisco expects to see the figure grow 7-fold by 2020 to 30.6 exabytes per month. Most of that rapid growth will be fueled by the burgeoning demand for video, which is expected to account for more than 75% of all mobile traffic by 2020.
Growing penetration of mobile devices such as smartphones and tablets is driving the demand for mobile data through the roof, causing wireless service providers to look for cost-effective ways to upgrade their networks in order to support and monetize the growing traffic. Juniper, which sees close to two-thirds of its revenues come from service providers, is positioned well with its strong service provider relationships to benefit from the growing demand for network equipment in the long term.
Internet of things domain is warming up
The IoT domain includes computing devices other than PCs, tablets and phones. Cisco estimates that the IoT market will be worth $19 trillion over the next decade, representing a $1.7 trillion market for service providers. McKinsey estimates that IoT could have an impact of up to $6.2 trillion on the global economy by 2025 The installed base for IoT devices is estimated to grow from around 10 billion connected devices today to as many as 30 billion devices (or 50 as per some estimates) by 2020. While these estimates may vary, they are in agreement regarding the huge potential of the market. Clearly there is a lot of growth potential for networking companies such as Juniper in addition to network infrastructure players and semiconductor companies. And with software defined networking gaining steam, hardware for IoT is likely to eventually get commoditized. Accordingly, it makes sense for Juniper to make investments on the software side.
Huge opportunities in the SDN space
There is an industry-wide shift in demand from hardware networking solutions to software-based ones, and this is likely to accelerate going forward. SDxCentral, along with Plexxi and Lightspeed Ventures Partners, estimated the global SDN market size at $3.4 billion in 2014 and they expect the market to jump to $35 billion by the end of 2018. In 2014, only 4% of total network spending was for SDN, which is projected to go up to 40% over the next three years. The emergence and growth of cloud computing, big data and mobility is responsible for this rapid hardware to software shift. The aforementioned metrics reflect massive growth potential for companies focused on SDN, which explains why Juniper is interested in pushing its software ahead of hardware.
Disaggregation of Junos
Junos is Juniper’s common operating system that runs across its routing, switching and security devices. The disaggregation from hardware will allow customers to use the operating system in a heterogeneous network environment. Juniper mentioned that developers will be able to directly program its systems using various application program interfaces (APIs). The company said it identified a growing need for flexibility within IT organizations, where they can make long term software investments and replace hardware whenever needed. The disaggregated Junos, which is based on Linux, can serve this purpose. The software can maintain data center switches just as a server would do, and run third-party applications, virtualized services and tools. It can allow DevOps and NetOps teams to work together, which can reduce delivery times and costs of various IT services. By running Junos on a virtual machine, the network infrastructure can be highly reliable and have an in-service software upgrade feature. Overall, the Junos software offers a multitude of benefits to organizations.
The Bring Your Own Device (BYOD) movement is causing corporate to increase their allocation of IT budgets towards enhancing network security. As employees bring their own mobile devices such as the iProducts as well as Android based smartphones and tablets to work, enterprises feel an increasing need to bolster their network security to effectively manage and support all devices while mitigating the threat of an outside attack. Addressing the BYOD movement presents Juniper with an opportunity to increase security revenue as well as improve the demand for its routing and switching solutions.
Cisco's alliance with Ericsson threatens Juniper
In 2015, Ericsson and Cisco announced a strategic partnership that will reportedly bring in $1 billion in incremental revenues for both companies by 2018. Cisco’s share in the global routing and switching markets has been declining consistently on account of growing competition from white label hardware and SDN companies. Through the deal, with Ericsson will reportedly sell Cisco’s products globally and offer managed services to allow quick integration of the networking company’s gear. Initially, Ericsson will look to sell Cisco gear to its existing customers such as AT&T, Verizon and Vodafone, and ultimately pitch complete solutions together to new customers. By pushing its bundled products through Ericsson, Cisco gains a geographical advantage. Ericsson’s business is spread over 180 countries, which potentially opens up an incremental revenue opportunity for Cisco. And this is not a good news for Juniper.
Cisco may have an edge in the IoT domain
The IoT domain is heating up, and many networking companies are investing in technologies that will ensure seamless connectivity between Internet-connected devices. Cisco has been partnering with companies to bolster its IoT portfolio and expand its reach into new markets. Its recent partnership with Ericsson and Philips, and a six year old alliance with EMC and VMware on cloud computing are indicative of this. The most consequential, however, is the recent acquisition of IoT service platform enterprise, Jasper. While Cisco has been highly proactive on the IoT front, Juniper has lagged behind with its approach. And this can be the differentiating factor when the IoT deployment kicks in.
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