Juniper Networks Inc. (Nasdaq: JNPR) stock got hammered today as investors reacted to news that core routing rival, Cisco Systems Inc. (Nasdaq: CSCO) was gaining market share at Juniper’s expense.

The company’s stock was trading down $1.75 (13.45%) to $11.26 this afternoon.

According to a report published by the market research firm Dell'Oro Group, Cisco gained 5 percentage points of market share in the core router market in the fourth quarter of last year (see Dell'Oro Looks at Router Dip). As a result, Juniper, the only other competitor in what has been a two-company market, suffered a 5 percent decline. For 4Q01 Cisco had 72 percent market share, up from 67 percent in 3Q01, says Dell'Oro. Juniper’s share dropped to 28 percent down from 33 percent in Q301.

Cisco has been gaining back market share in core routing since the first quarter of 2001. Cisco has gained 11 percentage points since the first quarter of last year when it had 61 percent of the market, according to the Dell'Oro numbers. Juniper had climbed to 39 percent of the market in 1Q01 before it started slowly losing its momentum throughout the year.

Cisco’s comeback is due in large part to its new GSR 12016 product, which began shipping last year. Cisco also introduced its own OC192 (10 Gbit/s) line card. For a while, Juniper had an edge, as the only router vendor with a 10-Gbit/s card. Cisco's upgrade erased that edge.

Both Juniper’s and Cisco’s recent earnings announcements also hinted at Cisco’s gains in the core. Cisco reported last week on its earnings call that it expects January 2002 revenues to be up slightly (see Cisco Beats Street; Growth is Flat). Juniper execs, on the other hand, indicated on the 4Q01 call in mid-January that they expect flat growth for the next few quarters at least (see Juniper Meets Lowered Expectations).

Of course, signs of Cisco's resurgence here have been evident for some time, and Cisco's addition of the 10-Gbit/s line card may have been the first writing on the wall (see Cisco Ships OC192).

“We do not believe that the market will view this news as a major surprise,” wrote Nikos Theodosopoulos, an analyst with UBS Warburg in a research note he published yesterday.

So why is the market reacting so negatively to this seemingly old news?

Sam Wilson, an analyst with Merrill Lynch & Co. Inc. says that he thinks some people were surprised at how much market share Juniper had lost.

Tim Savageaux, an analyst with W.R. Hambrecht & Co., says he thinks investors are reacting to a combination of bad news in the market. For instance, both WorldCom Inc. (Nasdaq: WCOM) and Qwest Communications International Inc. (NYSE: Q), two of Juniper’s biggest customers, are struggling financially (see WorldCom's Ebbers Stands Firm). Also, he says that the poor earnings announcement last week from Ciena Corp. (Nasdaq: CIEN) surprised and spooked some investors (see More Cuts at Ciena).

”The recent Ciena miss may have renewed concern about core networking,” he says. “Even though this is not dramatically new news, I’m not surprised to see the stock go down -- and I think it’s appropriate. Juniper stock isn’t cheap.”

The best hope Juniper has in the short term is the long anticipated announcement of its next-generation core router, code-named "Gibson" (see Juniper Mum on Core Router... ). Savageaux says this could help give the stock a small kick as the company fights to regain some of the share it has lost over the past year.

”This could be the catalyst for the stock to go north,” he says. "That’s where they can strike back and gain market share. This won’t be an announcement like from Lucent, where the product will come out six months to a year later. Juniper will have a customer and revenue when the news comes out.”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com