Juniper Stock Still Expensive Despite Growth Potential in Bottom Layer Switches

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Juniper's ( JNPR ) share in bottom layer switches, the most common type of switch that addresses layers 2-3 of network architecture, has increased from an estimated 1% in 2005 to 4% in 2009. We anticipate a more moderate pace of growth in the years ahead, as the network switches market is close to saturation and Cisco ( CSCO ) continues to dominated this segment with 55-60% share. While Juniper is a relatively new entrant, it also faces competition from mid-rung players like Tellabs ( TLAB ) and Alcatel-lucent ( ALU ).

While we expect Juniper's share in bottom layer switches to remain under 6% through our forecast period, the Trefis community projects that this number could continue its recent growth pace and breach 8%. The community forecast implies nearly 10% upside to our price estimate for Juniper stock.

While this upside potential is encouraging, we note that our base price estimate of $27.76 for Juniper stock stands well below market price.

Network Switches Market is Becoming Saturated

The network switches market is relatively mature and close to saturation. Most of its growth is driven by replacements and upgrades, rather than new customers entering the market or existing customers expanding usage. Further, there are limits to technical innovations in bottom layer switching and most of the upgrades center on an increase in processing speeds. As a result, competition is intense with a number of players fighting for a limited customer base. The market is extremely crowded with the likes of Alcatel-Lucent, Huawei-3Com and HP among others vying for the same opportunities.

Cisco's Formidable Position in Switches Market

Cisco has consistently maintained a market share of 55-60% in the bottom layer switch market through strong relationships with most of its customers. Cisco has grown so widely that its brand is almost considered to be synonymous with switches. This makes it tough for any competitor to break into Cisco's market unless it comes up with a vastly superior product or collaborates with other companies.

For example, to counter Cisco's move into the server space, IBM recently announced that it will be selling Juniper's network switches and routers under its brand name to complement IBM servers in data centers. Since data centers are one of the fastest growing business segments for the networking business, any push here is likely to boost Juniper's market share.

Trefis Community Forecast

The Trefis community forecasts that Juniper's share in bottom layer network switches will grow from 2009 levels of 4% to beyond 8% by the end of our forecast period. This marks notable upside to our base estimate that market share will remain below 6%. The member estimates imply an upside of nearly 10% to our $27.76 price estimate for Juniper stock . However, we note that this scenario would still leave our number well below the current market price.

Drag the trend line in the modifiable chart above to see how various bottom layer switch market share scenarios could affect Juniper's stock value.

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Our complete analysis for Juniper's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ALU , CSCO , JNPR , TLAB

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