Great Company, Expensive Stock

Talk about timing.

Just a week after Cisco Systems CEO John Chambers acknowledged that the current quarter has been “challenging” for the networking giant, the company’s most highly touted rival, Juniper Networks , hits a grand slam with a Q4 earnings report that smashed street expectations.

If only JNPR shares weren’t overpriced.

The maker of high-end network routers reported Q4 revenues of $295.4 million, or more than six times its $45.4 million for the fourth quarter of 1999.

Consensus Wall Street forecasts called for JNPR to post a net income of 18 cents per share. But the company made a mockery of that target, reporting Q4 net income of $84.6 million, or 24 cents per share, versus year-ago net profits of $4.8 million, or 1 cent per share.

Clearly, Juniper is on a huge roll. It has gone from virtually no sales ($3.8 million) in 1998 to owning more than a quarter (and growing) of the high-end router market. Unless Cisco mounts an effective counter-offensive, Juniper will be eating its lunch within two years.

Still, some perspective is in order. While Juniper has focused on the high-end market, Cisco runs the gamut. Thus, Cisco’s revenues of $6.5 billion in its latest quarter are more than 22 times the impressive sales racked up by JNPR in Q4. One of Juniper’s critical challenges is to broaden its product line, which it must do to continue its sizzling growth.

As things stand now, Juniper shares are courting a downturn, despite already falling 47% from their Oct. 16 close of $243. Even with that fall fizzle, JNPR was one of only three Internet stocks to gain more than 100% last year.

Factoring in the Q4 numbers, Juniper, with a market capitalization of $40.6 billion, now trades at 86x trailing 12 months’ revenue and 238x TTM earnings. The Standard & Poor’s 500 averages an earnings multiple of 20.

Throw in Juniper’s own Cisco-like words of caution regarding a slowdown in communications spending in coming quarters – CEO Scott Kriens said “Juniper is not immune” to a softening economy – and we’re looking at a stock with considerable southern potential.

In a Dec. 19 column highlighting infrastructure stocks to watch in 2001, I wrote that the “coming year will see more outstanding quarters from Juniper. But no other Internet companies have been able to sustain their excessive valuations, and neither will JNPR, which I expect to lose at least 50% of its current value before stabilizing.”

At the time, JNPR shares were at the same price they are now – about $128. I’ll stand by that recent prediction.

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