Juniper: An Underappreciated Stock With Potential Catalysts in Place
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Juniper's (NYSE: JNPR) valuation has been under a steady assault for the last couple of years now as Juniper has dropped ~14% year-to-date. The market has continued to undermine the possibilities for Juniper even when the stock has potential catalysts in the near and medium term. With the recently announced partnership with Riverbed (NASDAQ: RVBD) and the new product momentum, Juniper looks to generate incremental revenue streams in the coming years.
Effect of VMWare acquisition of Nicira:
VMWare (NYSE: VMW) recently acquired Nicira, a blow to Cisco (NASDAQ: CSCO) as it looks to address the multibillion market of Network Virtualization. Though many investors are concerned about the effect of this acquisition on the hardware vendors, we believe that Juniper is not as vulnerable as Cisco to the software‐defined networking trend. We believe that aggregation switches are at the greatest danger of losing margins, while high‐end routers (Juniper’s key area of strength) will be a more‐distant target given the importance of performance in enterprise solutions. Furthermore we believe that Juniper could take this opportunity to open its hardware to SDN software and position itself as an open‐standards substitute to Cisco’s closed platforms.
Strategic partnership with Riverbed:
Juniper during its earnings announcement put out a press release about the new partnership with Riverbed. Under the deal Juniper will pay a onetime fee of $75M to license Riverbed’s Stingray ADC technology and OEM for its products. Additionally Juniper will also integrate Riverbed’s Steelhead mobile optimization technology in its Junos Pulse software suite to provide WAN optimization for mobile Platforms and tablets. We view this deal as a positive for Juniper considering its lack of presence in the Layer 4-7 space after its acquisition of Redline and Peribit in 2005 didn’t bode well. We believe that Juniper’s strong presence in data center along with broader product portfolio gives it much better chances to make this partnership work now compared to the past acquisitions. We expect that this partnership could help address Juniper’s lack of traction in the ADC and WAN Optimization markets and will result in incremental revenues in the long term for Juniper.
Operating Expenditure cut in 2013:
Juniper announced that it will reduce the OPEX costs by $150 million YoY in 2013 through multiple productivity and efficiency programs, rather than a broad based headcount cut. The reductions are expected to start in 1Q13 while the results may be expected as soon as the second half of 2013. We believe that these cuts can act as a catalyst for Juniper as they would significantly boost the operating margins and consequently FCF in the coming year.
Furthermore, the new products from Juniper are tracking well as PTX, T4000 and QFabric saw strong demand in Q2 with a solid sequential revenue growth. We expect that US will continue contributing to the revenues in the second half of 2012 particularly with the Tier 1 service providers after a principally resilient demand in Q2. As Juniper looks to decrease OPEX in the coming months and with the new products gaining traction, we believe that there is a considerable revenue upside opportunity for Juniper and hence we rate this stock as a buy.
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