High-end router maker Juniper Networks closed below $30 per share on Wednesday.
It’s the first time since Aug. 10, 1999, that JNPR has finished below that mark. It’s also notable because a market observer I know theorized about three weeks ago that we’d reach the bottom when JNPR hit $30. At the time, Juniper was trading at twice its current price of $29.19.
Unfortunately, with the spate of early warnings for Q1 pointing to another dismal reporting season, more downward movement assuredly lies ahead. I’m tempted to say the bottom will come when JNPR hits $20, but at the rate things are going, that theory could be tested by next week.
Juniper entered the new year at $126.06, and has lost 76.8% of its value since then. No surprise, really, given that JNPR was highly overpriced as 2001 began, with a P/E ratio of 272x. Today JNPR trades at 63x trailing 12 months’ net income of $148 million.
The good news is that Juniper is an emerging star in the networking galaxy, with vast upside potential. Sales grew dramatically last year, but perhaps more important, earnings, gross margin and operating margin improved in each successive quarter — in other words, revenue growth was not achieved at the expense of fiscal sanity. This is a company headed in the right direction.
A February study by Infonetics Research highlights JNPR’s remarkable success in stealing market share from Cisco Systems . Juniper’s cut of the high-end router market grew to 30% in last year’s Q4 from 26% in the third quarter, while Cisco’s fell to 69% from 73%. Remember, this is a market that Cisco totally controlled less than 18 months ago. No other competitor has ever posed this kind of threat to the networking giant.
Cisco continues to stumble in the high-end networking market. On Wednesday, the company said it would cease selling an optical networking router acquired through its 1999 purchase of Monterey Networks for $500 million. It was an easy decision by Cisco, since it was having trouble selling any of the expensive fiber-optic routers in the first place.
While Juniper and Cisco are vulnerable to the current spending slowdown on networking equipment, demand for high-speed routers will increase significantly in the long-term. While high-end routers currently comprise about $2 billion of the $30 billion router market overall, it is the fastest-growing segment, expected to reach $12 billion in two years. Even if Juniper’s market share stays at 30%, that’s $3.6 billion in sales two years from now.
At what point does Juniper become a bargain? Should Q1 net income reach $60 million — or slightly less than Q4 — it would be trading, using today’s share price, at a P/E of 46x TTM net income. Should shares fall to $20, that P/E drops to 31x.
Still expensive in the short-term, if you ask me, but Juniper is a long-term play. At $20 per share, I think there’s a nice payoff down the road. But don’t be surprised if you eventually can get it for even less than that.
