It seems I’ve lost quite a few friends following my recent article on Juniper Networks, Inc. (NYSE:JNPR) . But I’ve said some things that needed to be said. Specifically, it’s time that investors forget this perceived rivalry with Cisco Systems, Inc. (NASDAQ:CSCO). These are two companies in separate leagues that are now heading in opposite directions.
I will concede that Juniper has some product launches on the horizon that can potentially revive its growth. Then again, we’ve been saying this for quite some time. And I’ve become annoyed that the stock is trading at almost five times the valuation of Cisco. Remarkably, despite dreadful fourth-quarter results, investors are still betting on a revival. But the optimism seems overdone, if not grossly misguided.
While networking/security sector often trades in tandem, investors are mistaken in thinking that the challenges facing one company are the problems of another. This is not often the case. Juniper’s growth story, as well as that of F5 Networks, Inc. (NASDAQ:FFIV) and Riverbed Technology, Inc. (NASDAQ:RVBD) are strongly predicated on the rebound in carrier spending. Consequently, they are always in a holding pattern.
That’s not the scenario with Cisco, which has much stronger exposure in the enterprise, and thus the thesis of my recent comparison to Juniper. While a rebound in carrier spending can help these shares, Juniper still has to answer for its lack of growth as evident by the 2% revenue improvement in its recent quarter.
Plus, there are also uncertainties about threats to Juniper’s long-term margins, not only from current rivals, but now it must outperform Oracle Corporation (NASDAQ:ORCL) after the database giant just picked off Acme Packet, Inc. (NASDAQ:APKT) for $2.1 billion. While it can be argued that this move by Oracle was more of an attempt to shore up its cloud offerings, thanks to Oracle’s existing enterprise footprint the company can now easily undercut Juniper with packaged deals.
What’s more, Oracle does not have to wait on carriers to strengthen revenue. And Oracle’s higher-margin cloud service business can be used to offset any potential weakness in hardware. This is not an advantage that Juniper enjoys today. However, in the recent quarter, Juniper’s service revenue did well by advancing 7% sequentially and 5% year over year.
However, it is still trailing Cisco’s 12% growth. The good news is Juniper is doing well in terms of profitability and cost management. Gross margin grew by two percentage points year over year and beat analysts’ estimates by a full point. Likewise, operating income was solid at 18%. The company was able to exceed its own guidance of 16% while topping consensus estimates by over two points.