Juniper Needs a Plan of Action Now
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Juniper Networks (NYSE: JNPR) acquires a software-defined networking firm that is only months in existence and is officially only two days old. Hooray? Not to sound purposefully difficult, and it's interesting, perhaps even noteworthy, but it hardly matters from an investment perspective. It should be all over the tech blog, though not necessarily the investment blogs in relation to Juniper. I have written about it too, because I was looking at Cisco Systems (NASDAQ: CSCO) and its future, which SDN has the chance of hurting. However, Juniper has current issues, and SDN is not the solution to those since it will be a while before it really takes off. I was worried about Cisco from a strategic perspective, like if it decides not to develop SDN the right way (the right way meaning the way that ends up dominating the market, not in a value-oriented right and wrong sense). The right way will not be certain until it is, but I prefer the fully soft network approach because it seems cooler and more futuristic.
An Unenviable Position
Juniper has to butt heads with Cisco above it, and Alcatel-Lucent (NYSE: ALU) is clipping at its heels. With the networking industry's weakness, this does not bode well for the company. It is not the market leader like Cisco, and it does not have diversity like ALU. I am not calling ALU a serious threat or a supremely strong company, but it is not as focused on networking as Juniper is. Juniper is in the slightly unenviable position of being up against an industry juggernaut, and it's a company where every dollar of profit is a victory rather than market share gains and improving fundamentals. ALU just needs more money coming in than going out, and that would be an improvement. Juniper needs to win customers, increase revenues, increase margins, and improve other fundamental metrics. Survival is not the issue but the quality of the business.
Juniper has some work to do on its fundamentals. Revenue is basically flat, earnings are not growing, and margins are low, but it does not seem like the stock has declined enough, at least when you consider its PE ratio, which is around 60. These indicators are trailing twelve months, which I prefer since they builds a trend. I see Juniper heading towards losses. Even if it can avoid this fate, it needs to reverse the trend not flatten out. The weakness is a result of a slump in the networking market that is hitting its competitors. Cisco is weathering the storm best.
SDN Success Will Take Time
So, despite Juniper's interesting choice for future development, I see it as an oblique attack on Cisco's hardware dominance. Some of the discussions I have read claim that Juniper is trying to make a strong play for the future and is a major strike at Cisco. If it is a major strike then it is one in slow motion. It is not betting on one of two existing technologies; it is choosing a path of development with the acquisition of Contrail Systems. From what I understand it is enterprise level SDN, which means the network is more hardware agnostic than its counterparts. Cisco seems to be developing a variety of SDN that layers on top of its current offerings, and this suggests to me it is just about easing concerns about cross-compatibility on a small scale between vendors and generations. I could be completely wrong since I am not a networking specialist. However, I am certain that everything I have read says that Juniper is going one way and Cisco is going another.
It will not be hard for Cisco to change tactics once it sees the writing on the wall. It has the balance sheet and strength to jump in with a well placed acquisition. The Contrail acquisition by Juniper seems more like buying the expertise of the company's employees. I simply refuse to believe Contrail made significant progress during its short life, but maybe I am wrong. My fear about Cisco is that it will go down the wrong path even when the signs turn against them.
Some Background on SDN
This SDN fervor began with VMware's (NYSE: VMW) acquisition of Nicira for $1.26 billion. VMware wants to bridge the gap between the enterprise networks and the cloud. This is all based on tentative reading, but Juniper and Cisco are focusing on what is going on with the network itself. VMware is focusing on linking the network with its other services if they are traditional or SDN networks. It is more a complementary strategy to the other companies rather than a direct competitor. As one of the biggest names in virtualization and the cloud, it can achieve success in parallel with the classic networking companies. That is good for Juniper, because it creates a potential ally if the companies want to work closely together, but more importantly it does not create yet another juggernaut in opposition.
The situation for Juniper is not so dire that you should run away if you already own it, but if you are thinking about buying wait. I would like to see more information about what the company plans on doing in the short-term to set things right. Instead of chasing explosive gains with an emerging area, it needs to bring in more profits now. Modest profits are acceptable for now, but the stock is not a buy based on something years down the line. All the news flying around right now is for something that will not bring in value for years. I still like Cisco, but I would watch it closely. I like ALU because the routers they are making are impressive, and its small cells dubbed lightRadio is one of my favorite products. ALU is only for the hardiest risk takers though.
TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of VMware. Motley Fool newsletter services recommend Cisco Systems and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!