Weak FY ’20 Results Could Drag Down Juniper Networks Stock

Juniper Networks stock (NYSE: JNPR) is up only around 3% since the beginning of 2020, but at the current price of around $25 per share, we believe that Juniper Networks stock has around 15% potential downside.

Why is that? Our belief stems from the fact that JNPR stock is up almost 1.5x from the low seen in March 2020. Further, after posting weak Q4 ’20 numbers, it’s clear that Juniper did not benefit from the pandemic as expected, and that networking product demand has still not fully recovered to pre-Covid levels. Our dashboard Buy Or Sell Juniper Network Stock? provides the key numbers behind our thinking, and we explain more below.

Juniper stock’s rise since late 2018 came despite a 4% drop in revenues, from $4.65 billion in 2018 to $4.45 billion in 2020. Net income margins dropped from 12.2% to 5.8% over the same period, as a result of rising costs across all operating expense heads. This, combined with a roughly 6% drop in the outstanding share count, led to EPS dropping by 52%, from $1.62 to $0.78 over this period.

Juniper Networks’ P/E (price-to-earnings) ratio rose from 17.6x in 2017 to 31.6x in 2019, as the investor expectations surrounding networking product demand rose, implying a rise in demand and selling prices. The P/E multiple currently stands around the same level, but given Juniper Networks’ weak Q4 2021 results, there is possible downside risk for Juniper’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns have led to a surge in online activity, which should have driven up demand for networking products, such as routers, switches, and security products, but this has not been the case with Juniper Networks. This is evident from Juniper’s Q4 2020 results, where revenue came in at $4.5 billion, same as that in Q4 2019. Further, the company was unable to control COGS and operating expenses, with operating income coming in at $353 million vs $442 million in Q4 2019. Despite a lower effective tax rate (3% in 2020 vs 16.7% in 2019), EPS came in at $0.78, down from $1.01 in Q4 2019.

Regardless, if there isn’t evidence of containment of the virus anytime soon, demand for the company’s products will remain weak in the near to medium term, and if the company is not able to control expenses, we believe the stock will see its P/E multiple decline from the current level of 32.4x to around 29x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $21, a downside of around 15% from the current price of $25.

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