New Paradigm Investing
It's the Market Share, Stupid

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By Y2Krash
April 26, 2001

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In times of economic weakness such as these, where possible, sometimes I find it much more useful to concentrate on gains in market share rather than year over year or sequential growth. In many cases, an individual company's growth rate is irrelevant to their competitive position within a market when numbers are simply examined individually. In fact, history has demonstrated that it is during these difficult economic conditions where true market leaders are made and where current market leaders solidify their competitive positions. When you actually look at the big picture from a long-term perspective, these market downturns actually benefit the strong companies over the long run because it thins out the herd (in Darwinian terms). Regardless of growth rates, if you bet on the companies that are capturing a growing share of the market during the difficult times you'll usually be holding onto the big winners once the market recovers. Below I've quickly analyzed two case studies using the most recent market data.

Core Router Market
As we all know, Juniper Networks reported impressive results earlier this month. Although growth has substantially slowed relative to last year, in comparison to its peers the company is performing exceptionally. Juniper's year over year growth was over 400% but its sequential growth slowed to only 12%, representing a significant deceleration. On the surface it appears as though there could be some cause for concern, however, if we compare the results to its competitors we get a very different picture. Analysts forecasts peg the quarter's overall WAN router market growth at 6% over last quarters numbers, a steep slowdown from the torrid 23% growth rate experienced last quarter. If this prediction is correct then Juniper should have captured another 2% of the router market, bringing its total to just below 36%. However, these projections were made before the true extent of the market slowdown was known. This combined with Cisco's recent announcement of a significant shortfall during this quarter could indicate that Juniper captured a larger portion of the market than originally thought. Taking Cisco's announcement into account I would not be surprised to find out that the router market was in fact flat with the previous quarter. If this is the case (and this is only my own speculation) then Juniper would in fact have captured closer to 4% in additional market share, bringing the total closer to 38%. With the recent launch of Cisco's OC-192 interface, many in the industry had been speculating that the days of Juniper's massively expanding market share would be over. If my speculation proves to be true then despite the overall slowdown, it would appear that Juniper is continuing to capture a growing share of the market.

Application Server Market
If we look at the App Server market we see a similar trend with BEA and IBM (although in this case the new entrant is leading the race). Although BEA has yet to report earnings for the coming quarter, considering the fact that Bill Coleman has reiterated that the company will meet estimates, we can make a rather safe comparison using the expected numbers. Last week, IBM released earnings that showed strong growth in its Websphere Application Server. Year over year growth came in at 53%, demonstrating that IBM is pulling away from the pack as smaller vendors begin to fall behind. However, if we examine BEA's expected growth rate in the coming quarter we see that it is expected to be substantially higher. Weblogic licensing growth is expected to come in at around 85% in the quarter ending April 30th. Not only is this number over 30 points higher than IBM but it is also coming off of a larger base. The result is that IBM has made it a two horse race with BEA as the others fall into the background and try to define some sort of niche to remain relevant. Unfortunately for IBM, it appears that BEA is beginning to pull even further ahead, reaching the point now where it would be extremely difficult for IBM to make up the lost ground. At this point I'm guessing that it will take only a few more quarters before I can call a definite winner.

Keep the faith; the good companies will eventually come back,