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Optical/IP

Jumping Juniper!

Last week Juniper Networks Inc. (Nasdaq: JNPR) reinforced its position as the leader among next-generation networking stocks when it was added to the Nasdaq 100. That had people buzzing that the move could be a precursor to the Really Big Announcement: addition to the Standard & Poors 500.

After all, gaining admission to the Nasdaq 100 is the Emmy, but winning the S&P 500 is the Oscar -- the gold standard.

Is it likely? Who knows? The S&P Board is a secretive bunch, and Juniper is a relatively young and small company. But its leadership among technology issues is undisputed.

"The S&P 500 strives to represent the whole market with just 500 stocks, so when a new industry or sector emerges, it needs to get included," says Don Luskin, CEO of MetaMarkets.com Inc. and an advisor to the Open Fund. "Juniper could represent the 'new era networking' concept. Now, with the affirmation by Nasdaq of membership in the 100, Juniper is more of a natural than ever."

Juniper's aggressive leadership in the high-speed routing market makes for an interesting story. It also serves as a stark contrast to JDS Uniphase Inc. (Nasdaq: JDSU), the last technology company to be added to the S&P 500.

Juniper, like JDSU, is one of the best performing rechnology stocks of the last two years. Juniper is up 276 percent in 2000 alone. But whereas JDSU has driven its growth through a voracious appetite for acquisitions, Juniper has been quiet on the acquisition front, content to focus on its core market: Internet Protocol (IP) routing.

Peers of Juniper CEO Scott Kriens remark that he exemplifies a disciplined, take-no-prisoners focus on winning his core market. And the results are remarkable: Juniper is the only company to ever take routing market share from the leader, Cisco Systems Inc. (Nasdaq: CSCO).

Cisco is looking over its shoulder at Juniper. After owning about 80 percent market share for the past year, Cisco slipped to a 74 percent share of the core IP routing market in the second quarter of this year, according to market-research from the Dell'Oro Group. Juniper, coincidentally enough, increased its market share from 17.3 percent last quarter to 23.6 percent this quarter. Do the math.

In fact, a recent tour of cutting-edge networking gear at the National Fiber Optics Engineers Conference (NFOEC) trade show in Denver revealed some important, if anecdotal, evidence of Juniper's new prominence. Most of the next-generation optical networking demonstrators picked Juniper as the router vendor of choice. Most notably, Tellium, a company in which Cisco invested, was touting interoperability between their high-speed optical switch and Juniper routers.

Cisco officials have downplayed the market-research numbers, saying it's a temporary slump that will be corrected when Cisco upgrades to high-speed OC192 (10 Gbit/s) data interfaces that are already available in the Juniper routers. But the numbers speak for themselves: Juniper is gaining on Cisco.

Juniper still has jaw-dropping valuation, trading at a market capitalization of $68 billion, about 280 times its 12-month revenues. To the naive observer, this would seem ludicrous. How could a startup that's been public for barely two years demand such a high value? But to market mavens, Juniper's a savvy gamble: The market has voted, and Juniper is a Cisco killer. The stakes are high. Cisco used its early dominance in the IP routing market to move into and dominate other networking markets, which all demand interoperability with the IP routing infrastructure. And to this day, IP runs the Internet.

If Juniper pulls it off and achieves dominance in the router market, it opens up a whole realm of possibilities. Its stock price is rich enough to buy all sorts of neat technology -- especially in the optical networking market. Juniper could then tie together those acquisitions with its IP routing software to build an integrated networking portfolio akin to Cisco's.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com
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