Given the lightening fast expansion that we are seeing in broadband market - something I mentioned last week in my recommendation of Cisco Systems Inc. (Nasdaq: CSCO), we are going to look at another strong beneficiary in the sector: Juniper Networks Inc. (NYSE: JNPR).
Juniper Networks beat estimates by a mile in its recent earnings report. It beat both on sales and margins expectations. However, some analysts have raised questions about the company's strategy. And I am one of them.
Let me explain.
While Juniper is a solid supplier to the networking market, its fairly new initiative to try to penetrate the enterprise sector raises doubts. The reason for such skepticism is that Juniper is going up against Cisco systems, which I recommended last week.
You can only get away with such a bold move by either exhibiting superior technology or entering into a costly price war. Since the first reason is not a compelling factor in this situation, the second strategy could possibly work.
In a price war, the company most negatively affected is typically the one that has the largest market share. In this case, that's Cisco by far. But even if Juniper were to pursue such a course of action, loyalty to Cisco's brand, well-established presence and service, and the risks involved in switching suppliers would likely prevent many corporate customers from taking the plunge, even if tempted with lower pricing.
Juniper's mere 1% growth in the enterprise sector, which is well below industry trends, points to an unsuccessful foray in this area. And the volatile demand by the telecommunications giants also showed a weak performance. But an in-depth analysis reveals a glimmer of hope: AT&T Inc's (NYSE: T) share of the business has grown from 9% to 13%. This is very important.
If we circle back to our Cisco analysis, remember that AT&T is seeing incredible growth in data traffic over its wireless networks. Traffic has increased by 20 to 70 times what it was three years ago. This will lead to huge "unexpected" profits for those who invest wisely, and it is the redeeming virtue in Juniper Networks.
We can talk numbers all day long, but the truth is that AT&T is, much to its regret, being forced to invest very briskly in their network to accommodate this data explosion. And people who talked down the data backbone infrastructure buildup are going to be very surprised. Other carriers are going to be forced to upgrade their own networks, because of the proliferation of data-hungry smartphones in the market. So the likes of Sprint Nextel Corp. (NYSE: S) and others are going to have to bite the bullet and invest in their networks to compete - whether they like it or not.
And in actuality, they will be expanding profits, because contracts that include unlimited data typically cost about $60 a month more per subscriber. And the allure of having internet everywhere and geo-location services available for intelligent search and routing is irresistible.
Juniper also was very conservative in its guidance. And with so many uncertainties about the future of employment and the consumer, who wouldn't be? In this environment, it is better to under-promise.
But the acceleration of the economy is becoming more evident: Last Friday's positive adjustment to U.S. fourth-quarter gross domestic product (GDP) from 5.7% to 5.9% is symptomatic of growth surprising to the upside. Hence, those who left tech early will leave a lot of value on the table. I have seen this many times.
So Juniper's 20% plus market share in the highly competitive router market is likely to remain stable while the industry booms. And the latter is the reason that makes us much more bullish on Juniper and allows us to overcome its distracting foray into the enterprise sector.
Technically, the stock has been going sideways as of late, consolidating the huge appreciation that we saw from the March 2009 lows. It recently bounced solidly from its 200-day moving average and it's trading above its 50 day moving average. It is not over bought.
This, plus the huge upside that we are going to see in the upgrading of data networks, gives me confidence that we are going to see Juniper Networks break from the range to the upside. It is not as attractive as Cisco, which given its market dominance and relative valuation is more attractive, nor as attractive as my two recent picks in the Money Map VIP Trader, which enjoy much more compelling fundamentals and valuations.
But it is attractive enough to surely warrant a buy recommendation from these levels, especially since the upside that I expect from the boom in data traffic has not been factored by Wall Street nor the company's own guidance.
Recommendation: Buy Juniper Networks Inc. (NYSE: JNPR) at market (**).
**Horacio Marquez holds no interest in Juniper Networks Inc.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities. being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]