Who's Killing the Networking Sector?

Last quarter, I was moved to highlight Juniper Networks (Nasdaq: JNPR  ) as one of the many rivals nibbling away at industry giant Cisco Systems' (Nasdaq: CSCO  ) market share. Juniper earned this distinction by matching Street expectations, partly thanks to steady orders from major customer AT&T (NYSE: T  ) .

The market didn't see Juniper my way, however, including short-sale recommendations on the stock by two Foolish newsletters. Shares slid into last night's earnings report some 20% cheaper over the last three months, causing the Motley Fool Alpha team to take its shorting profits and go home. And then the company backed up the negative view with slightly disappointing second-quarter results and a terrible outlook on the third quarter.

Sure, Juniper still hopes to grow its market share in 2011, but telecom network upgrades are slower than expected and then there's the macroeconomic bugbear to worry about.

That was enough to send Juniper shares straight to the basement without supper. So far, I'm looking at a 20% overnight drop and the intraday chart is still sloping southward. Alpha headquarters are ringing with the sounds of slapped foreheads today.

Even the bulls are moaning. Gleacher & Co analyst Brian Marshall, for example, kept the buy rating on his "innovator of choice" in the high-performance networking sector but lowered his target price from $50 to $38 a share.

Juniper is dragging down the entire networking sector, in fact. Ciena (Nasdaq: CIEN  ) shares are down by 10%, Alcatel-Lucent (NYSE: ALU  ) investors are staring down the barrel of a 7% drop, and even big ol' Cisco fell 3%. In the fiber-optic ultrafast network industry, JDS Uniphase (Nasdaq: JDSU  ) lost more than 7% and Finisar (Nasdaq: FNSR  ) saw a 9% swoon.

This is not the end of networking as we know it, but a firm correction of possibly overheated valuations and a stern slap across Juniper's knuckles in particular. Our bearish newsletter teams predicted a drop like this because management had been doling out overly aggressive market forecasts. I guess that's all in the past now.

Juniper is still an expensive stock, by the way: With shares trading at 4 times trailing sales, 24 times earnings, and 2.5 times book value, Cisco and Alcatel-Lucent look downright cheap by comparison.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of AT&T and Cisco Systems, as well as shorting Juniper Networks. 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. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.


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