I compared Arista Networks (NYSE:ANET) to Juniper Networks (NYSE:JNPR) last October. At the time, I concluded that Arista's higher gross margins and forward-thinking approach to replacing physical routers with cloud-based software made it the better networking play.
Arista's stock subsequently rallied nearly 40% as Juniper's stock advanced about 20%. But past performance never guarantees future gains, so we should review these two companies to see if Arista is still the better investment.
The differences between Arista and Juniper
Arista only sells networking switches and software-based networking services. It believes it can replace traditional routers by combining its switches with software-defined networking (SDN) solutions, and locks in its customers with a software platform called EOS.
Juniper is a more traditional manufacturer of switches and routers like Cisco (NASDAQ:CSCO). It also offers SDN solutions, and it's launching more hardware and software services for big cloud customers.
Arista and Juniper are both underdogs in the networking hardware market compared to Cisco and the Chinese tech giant Huawei. Arista controlled 6.4% of the global ethernet switch market in the third quarter of 2020, according to IDC, down from 7.6% a year earlier.
Juniper's share of the switch market slipped from 3.2% to 2.7% during the same period, but its share of the enterprise and service provider router market rose from 10.9% to 11.8%.
Cisco, the world's top networking company, controlled 49.9% of the switch market and 35.5% of the router market in the third quarter. Huawei accounted for 10.4% of the switch market and 28.3% of the enterprise and service provider router market.
However, Cisco's shares of both markets declined year over year, while Huawei expanded its presence in both markets, even as it faced blacklists and sanctions in multiple markets. It mainly achieved that growth by expanding its presence in China to offset its overseas losses.
Which company is growing faster?
Arista's revenue declined 4% to $2.32 billion in fiscal 2020. Its adjusted gross margin dropped from 64.1% to 63.9%, and its adjusted EPS fell 7%.
Arista largely attributed those declines to the pandemic, which significantly disrupted network upgrades throughout the first half of the year. However, its revenue rose 17% year over year in the fourth quarter, marking its first quarter of growth in over a year, and its adjusted earnings improved 8%.
Arista expects its recovery to continue with 20%-22% year-over-year revenue growth in the first quarter, while analysts expect its revenue and earnings to rise 16% and 11%, respectively, for the full year.
Arista attributes that growth to rebounding enterprise sales, especially to "cloud titans" like Microsoft, a rising mix of higher-margin software and services, and the secular shift from fragmented "data silos" toward seamless cloud environments boosting demand for its cloud-based SDN solutions.
Juniper's revenue stayed flat at $4.45 billion in fiscal 2020 as it struggled with the same pandemic-related headwinds as Arista. Its gross margin slipped from 58.9% to 57.9%, as higher supply chain and logistics costs during the pandemic offset its growth in higher-margin software revenue. Its adjusted earnings fell 10%.
Juniper anticipates a slower top-line recovery than Arista. It expects its revenue to rise about 6% year over year in the first quarter, and for its adjusted earnings to grow about 8% at the midpoint. Analysts expect its revenue and earnings to rise 4% and 7%, respectively, for the full year.
Like Arista, Juniper is pivoting toward cloud-ready hardware and services to offset the slower demand for its legacy service provider products. Its cloud business grew for the second straight year, and it expects new market opportunities -- including the 400G and 5G markets -- to drive long-term demand for its products and services.
The valuations and dividends
Arista trades at 25 times forward earnings, which is nearly double Juniper's forward P/E ratio of 13.
Arista's stock is pricier because investors are expecting a stronger recovery, but Juniper's stock also looks cheap relative to its projected growth this year. Juniper also pays a forward dividend yield of 3.4%. Arista doesn't pay a dividend, while Cisco pays a comparable forward yield of 3.3%.
I think both stocks will continue climbing this year. But if I had to choose one over the other, I'd still stick with Arista. It generates stronger growth and operates at higher margins, and it's built with disruptive secular trends -- such as generic "white box" hardware and software-based routing -- in mind.