Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Arista Networks vs. Juniper Networks

By Leo Sun – Updated Mar 2, 2020 at 11:38AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Which networking underdog can stay out of the doghouse during the market downturn?

Arista Networks (ANET 0.45%) and Juniper Networks (JNPR -0.18%) are both underdogs in the networking hardware market dominated by Cisco (CSCO 0.41%). All three stocks slumped over the past 12 months as macro headwinds throttled network upgrades and coronavirus concerns exacerbated the pain.

I compared Arista and Juniper in late 2018, and concluded that Arista's disruptive technology, lack of legacy baggage, robust growth, and market share gains made it a better investment than Juniper. Unfortunately, both stocks have declined over 20% since then. So is Arista still a better investment than Juniper? Let's take a fresh look at both stocks to decide.

Networking connections across the world.

Image source: Getty Images.

The key differences between Arista and Juniper

Arista's main strategy is to disrupt Cisco's restrictive bundles of proprietary hardware and software. Arista believes that the future of networking lies in software-defined networking (SDN) solutions paired with cheaper switches instead of pricier bundles of proprietary switches, routers, and software. This strategy made Arista a popular choice for cost-conscious enterprise customers and a thorn in Cisco's side. Arista controlled 7.6% of the global switch market in the third quarter of 2019, according to IDC, up from 6.6% a year earlier. Cisco's share fell from 54.4% to 51.3%.

Juniper is a traditional manufacturer of routers and switches. Its share of the router market fell from 13.4% to 10.9% between the third quarters of 2018 and 2019, while its sliver of the switch market grew from 3% to 3.2%.

Over the past few years, Juniper followed Arista's lead into the cloud-based networking market with SDN hardware and software. It also launched new cloud-optimized switches for data centers and acquired Mist Systems, an AI-driven wireless network solutions provider, last year. Those strategies helped Juniper remain relevant in an evolving market, but also squeezed its gross margins as it pivoted toward cheaper hardware.

Which company is growing faster?

Arista generated much stronger revenue growth than Juniper over the past five years, thanks to stronger orders from cloud customers and its acquisitions of smaller companies like Mojo Networks and Metamako. However, its growth decelerated significantly in 2018 and 2019 as top cloud customers reined in their spending.

Juniper's revenue declined over the past two years as soft demand from the cloud and service provider markets offset the more stable growth of its enterprise business. Competition from larger companies, like Cisco and Huawei, also made it tougher for both companies to grow in a shrinking market.

YOY revenue growth

2015

2016

2017

2018

2019

Arista Networks

43%

35%

46%

31%

12%

Juniper Networks

5%

3%

1%

(8%)

(4%)

Source:Company annual reports.

Analysts expect Arista's slowdown to continue with a 1% revenue decline this year, but they expect Juniper's losing streak to end with 1% revenue growth thanks to Mist and warmer demand in the cloud market. However, investors should take those forecasts with a grain of salt, since they don't fully account for the ongoing coronavirus outbreak and other recent macro headwinds.

Arista's gross margins have consistently remained higher than Juniper's over the past five years. It attributes its steady margins to its pricing power in the enterprise market and the growth of its higher-margin software products, which offset the negative impact of tariffs on its Chinese-made products. Juniper struggled as it transitioned toward cheaper hardware as tariffs rose.

Gross margin

2015

2016

2017

2018

2019

Arista Networks

64.9%

64%

64.5%

63.8%

64.1%

Juniper Networks

63.4%

62.2%

61.1%

59%

58.9%

Source: Company annual reports.

The valuations and verdict

Wall Street expects Arista's earnings to decline 10% this year, which is a dismal growth rate for a stock that trades at 26 times forward earnings. Juniper, which trades at 14 times forward earnings, is expected to post 2% earnings growth this year. Arista doesn't pay a dividend, but Juniper pays a decent forward yield of 3.6%.

I believe Juniper is a safer investment than Arista for now. Its low valuation and high yield should limit the stock's downside potential, and the current forecasts suggest that its declines are bottoming out -- although those estimates could change if the coronavirus crisis worsens. Arista's long-term outlook still looks healthy, but investors should avoid it until it hits a cyclical trough.

Editor's Note: An earlier version of this article mischaracterized the pricing and power specifications for Arista Networks' products and that its EOS software is open source. The article has been updated to correct these issues. 

Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Juniper Networks Stock Quote
Juniper Networks
JNPR
$27.58 (-0.18%) $0.05
Arista Networks Stock Quote
Arista Networks
ANET
$121.35 (0.45%) $0.54
Cisco Systems Stock Quote
Cisco Systems
CSCO
$41.99 (0.41%) $0.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.