Juniper Networks (NYSE:JNPR) was a Wall Street favorite for much of last year in the communications and networking industry, but after a poor second-quarter performance, shares are lower by 10%. The routing giant and security solution provider faces increased competition from the likes of Alcatel-Lucent (NYSE:ALU) and Palo Alto Networks (NYSE:PANW), but with that said, should investors sell the stock following one bad quarter?

50% of Juniper's problem
In the second quarter, Juniper's revenue jumped 7% to $1.23 billion to compliment an impressive operating margin of 22.3%, which has risen from 18.9% last year following cost-cutting measures. Yet, the problem for Juniper is not margins, but rather growth, as its revenue has decelerated in each of the last three quarters on a year-over-year basis. Furthermore, its third-quarter revenue outlook of $1.17 billion implies the company will be well short of expectations, continuing its trend of decelerating growth.

With that said, Juniper derives 50% of its revenue from routers, specifically core routers, which handle large amounts of traffic from one network to another. In this segment Juniper saw growth of just 7% year over year, or $617.8 million, which was disappointing to some investors.

Notably, Juniper has been a Wall Street favorite, with a lofty earnings multiple of 25, because its routing business was so strong. However, Juniper now finds itself under-performing Alcatel-Lucent, which saw routing revenue of $750 million during its last quarter, including 16.4% year-over-year growth.

With routing being a strong driver of margin growth, Alcatel-Lucent has placed increased emphasis on this space in recent quarters. In the past, Alcatel was primarily dominant in edge routers, used for faster routing with smaller loads of traffic between networks. However, it, too, has penetrated Juniper's core routing space, which may explain why growth is decelerating for this segment of its business.

A missed opportunity unfolds
Albeit, Juniper may have a problem in routing, but fortunately this was foreseen by many analysts who cover the company. In fact, security was believed to be a new growth driver for Juniper, as many of its customers have an increased need to protect valuable information from the increased threat of cybercrime.

Unfortunately, Juniper is lagging immensely within security, which saw revenue decline from $126.1 million last year to just $111.6 million this quarter. While it accounts for less than 10% of total sales, investors expected the segment to be a bright spot, or that Juniper would invest more heavily into rapidly growing security ventures.

Instead, companies like Palo Alto Networks continue to thrive, reporting revenue growth of nearly 50% year over year during its last quarter to $150 million. Palo Alto provides malware protection and next-generation firewall protection on an array of networks, but also for the virtual and cloud environment.

Clearly, Palo Alto's penetration is invading Juniper's turf, with Palo's revenue (excluding cloud security subscriptions) rising 39% year over year. For Juniper investors, Palo Alto's success might feel like a missed opportunity. After all, Palo Alto's security business is not much larger than Juniper's, yet the company's growth and the continued belief that Palo Alto will capitalize on increased security refreshes within the enterprise space, has it valued at more than $6 billion, or 60% of Juniper's market capitalization. Thus, had Juniper played its cards right in security, the company could be significantly more valuable today.

Foolish thoughts
The under-performance in both routing and security is a problem for Juniper investors, and in looking at the industry as a whole, it's hard to imagine a scenario of vast improvements. Juniper fumbled the ball in security, and Alcatel-Lucent's mere size and presence poses as an enormous threat to Juniper's core business. Nonetheless, with these issues in mind, Juniper's problems don't appear to be a one-quarter occurrence, but rather a continued sign that shares could have much further to fall.

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Brian Nichols owns shares of Alcatel-Lucent (ADR) and Apple. The Motley Fool recommends Apple and Palo Alto Networks. The Motley Fool owns shares of Apple. 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.

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