The stay-at-home policies that have been enforced across the world over the last several months to try to limit the spread of COVID-19 have highlighted the need for solid networking infrastructures to support the increasing demand for remote computing capabilities. That bodes well for computing network vendors.
Juniper: Modest valuation, low margins, weak growth
Juniper was founded in 1996 with a focus on selling routing devices (equipment that moves network traffic between different networks) to internet service providers. It then expanded its footprint into pretty much all networking areas, such as campus (enterprises' local networks) and cloud computing and providing routing and switching technologies (connecting computers and servers together in the same physical network). The company also enhanced its portfolio with complementary cybersecurity and Wi-Fi capabilities.
Juniper generated revenue of $4.6 billion in 2019, down 4.2% year over year because of the weakness in its service providers segment, which represented 41.1% of revenue. During the first quarter, that segment declined 14% year over year because of coronavirus-induced supply chain challenges. However, service providers should still represent an important business for Juniper over the next several years given the significant investments the deployment of 5G requires.
Also, after several years of disappointing performance, Juniper's cloud segment grew 17% year over year, and management expects modest revenue growth this year. That improving cloud business, which represented 23.8% of revenue in 2019, is due to the company's transition to new networking products that better address cloud vendors' requirements for scalable, performant, and cheaper networking solutions.
However, partly because of that evolving product mix, Juniper's trailing-12-month operating margin has been dropping over the last few years, reaching 10.5% during the first quarter.
Arista: Cloud networking specialist
Arista, founded in 2004, proposed innovative cloud networking solutions that took advantage of the difficulties legacy players Cisco Systems and Juniper had in addressing cloud vendors' demands.
As a result, the company grew its revenue from $584.1 million in 2014 to $2.4 billion in 2019. With its strong cloud business, Arista generates an important part of its revenue from a few giant cloud customers (cloud titans). Last year, Facebook and Microsoft represented 40% of total revenue.
That concentration of huge customers involves important revenue volatility. As an illustration, during the last quarter revenue decreased by 12.2% year over year, partly because of the different spending patterns of some cloud vendors.
But dealing with existing large customers also allows the company to minimize its sales & marketing expenses as a percentage of revenue. That led to an impressive improving operating margin of 32.6% during the last quarter, which contrasts with Juniper's declining weaker margins.
Arista is diversifying away from its core cloud networking business, though. In 2018 it announced its first steps into the campus area, and it enhanced its portfolio with Wi-Fi capabilities -- like Juniper -- thanks to its acquisition of Mojo Networks.
Since management expects $100 million of accumulated revenue from the campus area by the end of next quarter, that segment still represents a modest contribution to total revenue. But with their increasingly overlapping businesses in the different networking areas, the competition between Arista and Juniper is intensifying.
Logically, given Arista's superior revenue growth and stronger margins compared to Juniper, the market values the cloud specialist at higher enterprise value-to-sales and enterprise value-to-EBITDA ratios of 5.9 and 17.1, respectively.
Verdict: Arista wins
Both Arista and Juniper accumulated large cash positions, net of debt, which isolates them from financial difficulties even if a prolonged recession materializes. Thus, deciding which one is a better buy comes down to choosing between paying more for Arista's higher revenue growth and stronger operating margins or preferring Juniper's weaker business at a lower valuation.
Given Arista's superior execution over the last several years in its core cloud computing market, which is poised to keep on growing over the long term, Arista seems to be a better buy despite its richer valuation ratios.