Analysts in the computer networking sector have started to give Juniper Networks (Nasdaq: JNPR) a bit of the respect they had reserved for market leader Cisco Systems (Nasdaq: CSCO). Are we looking at a sea change in the router market?
Three months ago, 21 of 33 Wall Street analysts following Cisco rated its stock a "buy," but there are only 17 thumbs-up ratings amongst 32 analysts today. Meanwhile, Juniper moved from 12 buys in 28 ratings, to 14 out of 28. In our Motley Fool CAPS community, the underdog has held steady at three stars, but Cisco makes the occasional foray from four stars to five-star perfection. What's going on here?
A couple of analysts think that Cisco's midrange edge routers and big-ticket core routers are getting dated, and the company would do well to bring out some fresh hardware for those high-traffic customer segments. That's where Juniper's threat looks strongest, as the competitor grew this segment's revenue by 43% over last year while Cisco tacked on only 8% higher sales.
But I think our CAPS kids got it right. Even if Juniper is making a spirited run at Cisco today, its $3.2 billion in trailing sales is far, far behind Cisco's $39.5 billion. Even Alcatel-Lucent (NYSE: ALU) and Nortel Networks (NYSE: NT) have Juniper beat in straight network equipment sales, though Juniper is growing faster than either of them.
What hurts the most, though, is Juniper's valuation. The stock is worth around 18 times forward earnings estimates, while Cisco sits at 15 and Nortel is about 8. CIENA (NYSE: CIEN) and 3Com (Nasdaq: COMS) trade at approximately 10 and 7 times forward earnings, respectively.
So OK, Cisco's systems are getting a bit long in the tooth, but customers are still buying them. I'm sure that CEO John Chambers has his troops working on improved hardware behind the scenes, ready to unleash the new stuff on the market when the time is right. Why cannibalize a market-leading product line with next-generation upgrades before your customers ask for it?
Chambers expects to remain "the clear leader in routing in all categories and our customers who we have disclosed our current and future plans to would probably agree with that." Cisco has a very strong and deep relationship with its big-name customers, and I think this guy has an ace or two up his sleeve. Sorry, Juniper, but you will stay second-best for a long time yet.
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