Juniper Fairly Valued At $23.50, If Q4 Doesn't Throw Up Any Emerging Markets Surprise

Juniper's ( JNPR ) shares have gained more than 20% in value since the company released its Q3 earnings in October. The company's Q3 revenues grew by 6% over the same period last year and its operating margins expanded to the highest level in almost two years. The revenue gains were mostly driven by sustained strength in the service provider market, which continued to recover well from the macroeconomic overhang of the Euro debt crisis. The service provider outperformance was led by gains in routing, as the company's newly launched MX line of edge routers drove a 22% year-over-year growth in routing revenues. Juniper's guidance for Q4 was a bit disappointing though, but its concerns were mostly centered around the recent U.S. government shutdown which could have an adverse impact on federal spending in the near term. However, given that government revenues account for only about 4.5% of Juniper's business, any impact from the federal weakness is to likely be limited in the long term.

See our full analysis of Juniper Networks

What has also contributed to the recent bullish sentiment in Juniper's stock is its CEO's vehement denial of any emerging market weakness in networking, either due to the Snowden effect or macroeconomic headwinds, in November. The CEO's comments came after Cisco alluded to the same as reasons for its Q1 revenue miss and guided for an unanticipated decline of 8-10% in revenues for the next quarter. (see Cisco Suffers From Emerging Market Slowdown, But Margin Improvement Is Promising ) Juniper's asserted that it is not seeing a similar impact and will therefore keep its Q4 guidance intact. This sent a strong signal to the market that it could gain networking share at the expense of Cisco in emerging markets, at least in the near term.

Juniper's specialized focus helps

While we will have to wait until Juniper reports its Q4 results to see if the company is actually realizing such market share gains, it does seem that the company's lower exposure to certain diverse market segments is currently proving to be a blessing. Partly, the reason for the downturn in Cisco's revenues was its set-top business, which has been suffering from commoditization and pricing declines. As a result, Cisco is transitioning its video business to the cloud and has taken a conscious decision to not pursue low-profit deals, causing set-top box ( STB ) sales to fall steeply to the detriment of its overall revenue growth. Juniper's lack of exposure to the STB market shields it from this impact.

Meanwhile, Juniper's greater dependence on service providers, which account for almost 66% of its overall revenues, is helping it benefit from the ongoing 4G LTE transition around the world. China, which recently handed out TD-LTE licenses and is likely to issue FD-LTE licenses this year, is preparing for a nationwide shift to 4G in the coming years. The largest wireless carrier in China, China Mobile, which is also a Juniper client, has launched 4G in a few cities and will aggressively expand the network to other regions in the country to mitigate the impact of slowing voice and SMS usage and capitalize on the burgeoning demand for data. Even globally, the trends of data growth, mobility and cloud computing remain strong despite several macroeconomic upheavals in recent years. Mobile data traffic continues to grow exponentially with the rapid proliferation of mobile devices such as smartphones, e-readers and tablets. According to a recent Cisco VNI report, data traffic on mobile devices grew 70% in 2012 and is expected to grow at a CAGR of about 65% over the next five years. (( Global Mobile Data Traffic Forecast Update, 2012-2017 , Cisco, February 6th, 2013))

Juniper well into its product cycle, unlike Cisco

Although we expect Cisco to also benefit from the future demand for high-performance network infrastructure, it is currently in the midst of some product transitions such as from the earlier generation CRS routers to the new CRS-X and NCS upgrades on the service provider side. This has extended delivery timelines and impacted sales as carriers test out the new products before deployment, accentuating the emerging market slowdown. On the other hand, Juniper's new products such as P4000, PTX and QFabric have already spent some time in the market. As of last quarter, these products accounted for about $110 million, or 12%, of its overall product revenues. Juniper is also confident of achieving a quarterly revenue run rate of $150 million for the new products by the end of the year, when they could account for almost 20% of total revenues by our estimates.

Going forward, we believe that Juniper is well positioned with its new products to benefit from the growing demand for data, both on the service provider side, as well as enterprise side, barring any emerging markets surprises. Its Q4 results will shed more light on the concerns that bigger rival Cisco raised in its November earnings call and if Juniper could face similar issues down the road. Our $23.50 price estimate for Juniper is about in line with the current market price after the recent run-up in shares.

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

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

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