Arista Networks (ANET 13.59%) and Juniper Networks (JNPR +0.00%) are both underdogs in the networking hardware market dominated by Cisco (CSCO 2.94%). 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.
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.
