Why Juniper’s Stock Looks Undervalued

Juniper Networks (NYSE: JNPR) is undergoing a significant transformation to its core business due to a prolonged slowdown in spending by service providers, which weighed on its results for most of 2019. However, things turned better for the technology hardware company in Q4 2019, with its cloud and enterprise verticals more than offsetting weakness within the service provider business. Juniper’s stock declined steeply after it announced Q4 2019 results, though, as soft guidance outweighed the company’s strong Q4 2019 performance in investors’ minds. We believe that the market overreacted to the news and estimate Juniper’s valuation to be around $25, which is roughly 10% ahead of the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

Fiscal Q4 2019 Earnings Recap and FY 2020 Guidance

• Juniper delivered a strong performance for its fiscal fourth quarter, with the company beating consensus estimates for earnings and revenues.
• The company’s total revenue increased by 2% year-over-year to $1.2 billion, driven by strength in the cloud and enterprise verticals, partially offset by weakness in the service provider business.
• Moreover, the company reported non-GAAP earnings per share of $0.58 – above the mid-point of its guidance range thanks to steady revenue growth.
• However, Juniper provided a rather weak outlook for 2020. The company expects modest revenue growth while the gross margin is expected to be mostly flat versus 2019 levels. Additionally, the company expects higher non-GAAP operating expenses as compared to 2019, which will likely weigh on the company’s profits.

#1. Cloud Is Juniper’s Most Important Business Vertical

• Juniper’s cloud vertical includes companies that are heavily reliant on the cloud for their business model’s success. After declining steeply over 2016-2018, the cloud segment returned to growth in 2019.
• Cloud revenues grew by 1% year-over-year to $1.06 billion, partially offsetting a 12% decline in the service provider business.
• Switching products continued to witness strong demand – pushing up overall growth in the cloud business.
• Juniper’s cloud business should continue to achieve steady growth in 2020 as cloud providers begin to adopt new network technologies to improve their infrastructure early.
• Moreover, the company is developing the industry’s first 400-gig optimized routing platform that should further support its cloud business.

#2. Software’s Contribution To Juniper’s Revenue Is Steadily Increasing

• Juniper’s software business grew 16% in 2019, accounting for nearly 10% of the company’s total revenues.
• The company has done well to disaggregate its software offerings over recent years – allowing it to sell its software products separately from its hardware products.
• Juniper’s business is well-positioned to achieve steady growth for its subscription software business, which in turn should boost the division’s profits.

#3. Shrinking Margins Are A Cause For Concern

• Juniper’s operating margin contracted by 240 basis points from 12.3% in 2018 to around 9.9%, primarily driven by lower revenues as well as markdowns higher operating expenses.
• Moreover, the company expects operating expenses to be higher in 2020 as compared to 2019, while gross margin is expected to flat or slightly up.
• Higher operating expenses coupled with flat revenues will weigh on the company’s bottom line, resulting in Juniper’s profits shrinking by nearly 6% in 2020.

Per Trefis estimates, Juniper’s adjusted EPS for 2020 is likely to be $1.65. Taken together with a P/E multiple of 15.4x, this works to a fair value of $25 for Juniper’s stock, which is roughly 10% ahead of the current market price.

We highlight how Juniper’s P/E multiple has trended over the years and compare this key metric with that for its peers Cisco and F5 Networks in our interactive dashboard.

See all Trefis Price Estimates and Download Trefis Data here

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