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Optical/IP

Is Juniper Junior-Grade?

Analyst Ed Zabitsky of ACI Research has put a Sell Short recommendation on Juniper Networks Inc. (NYSE: JNPR). Harsh.

Now, some of that has to do with a run-up in stock price. He'd listed Juniper a Strong Buy when the stock traded around $14, back in February -- then Hold at $19, Sell at $23, and now Strong Sell at $26.17. See the pattern?

But Zabitsky is also worried that Juniper isn't keeping up with a shifting market, particularly when it comes to the emergence of packet-optical transport systems (P-OTS), which could have a chance to usurp routers in certain parts of the network. (See Does Juniper Need Packet-Optical?)

"Juniper really saved themselves when they came out with a stronger Ethernet strategy and a VPLS strategy," he says. (See Juniper Storms Into Ethernet Switching.) "But before that point, they were headed south, and I just think they're at the same kind of point here."

Juniper, which declined to comment on Zabitsky's report, has teamed up with Nokia Networks to offer their products in tandem as an IP and DWDM combination. The companies plan to start a joint venture in carrier Ethernet as well. (See NSN, Juniper Converge IP & Optical and NSN, Juniper Plan Ethernet Marriage.)

But Zabitsky sees Juniper as the junior partner in both cases. It's NSN's network management system that will run the Ethernet systems developed by the joint venture. And NSN's OSS is the one in control in the IP/DWDM partnership, which involves interoperability between a Juniper router and NSN's optical transport box.

Of course, Juniper and NSN aren't describing the relationship that way. For example, NSN has told Light Reading that its management system is used in the IP/DWDM partnership for reasons that are practical, not political.

"From a functionality point of view, the transport management system at Layer 1 can look at a wider spectrum of the network than Layer 3," says Pathmal Gunawardana, NSN's director of business development. "With Layer 1, you can also see the Layer 2 and Layer 3 [parts of the network], and potentially even Layer 4."

Separately, Zabitsky has his doubts about the chances of the Ethernet joint venture. "I get the sense that the combined entity has some seriously heavy lifting to do. Tell me the last time a successful, fully integrated product came from two companies."

In addition to worrying about new product areas, Zabitsky sees trouble for Juniper in its router franchise, thanks to market-share advances from Alcatel-Lucent (NYSE: ALU). "There's no question in my mind that Alcatel-Lucent is pushing Juniper out of the way, very slowly and steadily," he says.

It's not as if Zabitsky's Sell Short rating is part of a trend. Most analysts have Juniper rated a Hold, according to Thomson Reuters .

Here's the breakdown -- which, by the way, doesn't include ACI. We threw in a Cisco Systems Inc. (Nasdaq: CSCO) comparison just for fun, although we should point out that Cisco and Juniper aren't on the same plane when it comes to Wall Street.

Table 1: Analyst Recommendations
Rating # of brokers:
Juniper
# of brokers:
Cisco
Strong Buy 7 14
Buy 5 8
Hold 23 14
Underperform 2 1
Sell 0 1
Source: Thomson Reuters




If you're curious, the one Sell recommendation on Cisco comes from Per Lindberg of MF Global Securities Ltd. He's the fellow who railed against the merger of Alcatel and Lucent in 2006. (See Analyst: Alcatel Should Rethink Things and Could CDMA Hurt Alcatel Lucent?)

— Craig Matsumoto, West Coast Editor, Light Reading

paolo.franzoi 12/5/2012 | 3:59:13 PM
re: Is Juniper Junior-Grade?

I actually agree with Craig.  An analyst actually taking a position on his/her own analysis of what he/she thinks the market will do in the future.  Remember there is a 2 point hypothesis here by the analyst:


1 - Juniper stock is already expensive relative to the market


2 - There is a future risk to earnings by the changing market conditions


The latter is where you have focused, but remember the two are linked.  To justify a PE of 30 (and a PEG of way over 1.5), one has to be clear that the future earnings are going to be there.  If not, then the stock price is too high.  Risks to future earnings should be factored into people's view of a PEG.  Remember, it is not next quarter's earnings that are at risk but next years earning and the year after that.


It is through high growth in the out years that people justify high PE ratios and thereby high stock prices.  As an investor, any risk to those out year earnings should temper the view to those outlying year earnings.


So, quit being so nerd raged and this logically about the stock and the earning potential of the company.


 


seven


 

^Eagle^ 12/5/2012 | 3:59:13 PM
re: Is Juniper Junior-Grade?

I think the stronger part of the analysts arguments, as you have both pointed out, is the stock has already run up past the forecast or projected levels, the stock fundamentals indicate that Juniper is overvalued, according to this analysts metrics.


I think his technical arguments are pretty weak and shows lack of knowledge about the real differences in these optical interfaces and protocols and also shows the analysts knowledge in addition to being lacking, what is there is fairly shallow from the technology side.


I agree with your arguments regards P/E, earnings growth, etc.


sailboat

^Eagle^ 12/5/2012 | 3:59:13 PM
re: Is Juniper Junior-Grade?

Folks, been reading the posts on this.  I think everyone is missing a couple of salient points.  Would any one argue that Cisco has a REAL, end to end, access, to metro to long haul to switching, optical transport suite of products?  Sure, some edge aggregation and some overlay bits by putting transponders inside the router shelves...and some metro dwdm sales.. I think they are 4th or 5th in that space, having risen up to #3 in a few quarters to fall back down.  But true, end to end, optical transport?  Not even close.  So, when Cisco deploys high end systems, by default the carriers are partnering these routers with transport solutions from one of the large optical systems vendors like ALU, Huawei, Nortel, NSN, Ericsson-Marconi, Fujitsu, etc. etc.  


And regards the internal optical stuff at Cisco, Cisco OEM's most of the optical bits, either by buying bolt on ROADM's and DWDM shelves (as in how they got DWDM into the old Cerent boxes), or buys transponders that plug in, or buys whole subsystems like they do from Stratalight / Opnext.  I think compared to this, if Juniper wanted to get to the "optical transport" level that Cisco is really at, they can do the same thing, bolt on gear.  I think it would be easier for Juniper to get the add on hardware to do optical than it would be for instance for a Tellabs or even NSN, to develop the robust router code and system that Juniper has. 


The semi-commoditization of optical modules and components via pluggable transceivers and transponders, ROADM subsystems, and smart EDFA sub-systems; has made it easier to add these functions for a company like Juniper.  


I believe if they choose, it would be pretty easy to match what Cisco has for opto at a much lower cost of entry than Cisco had to pay.


From a technical point of view, in terms of optics, I just don't see that big a gap between them.  Where Cisco has a lead, it would be pretty simple to erase from a technology pov.  By the way, both have announced 100G transport support for line side optics in addition to client side optics in their 100G road maps via some kind of transponders or modules.


My main 2 points: 1) Cisco doesn't have all that much "opto" that couldn't be caught up with fairly quickly as Cisco OEM's much of what they do have at various levels.  2) in virtually ALL deployments of real large clouds of high end routers, be they Juniper's or Cisco's, there is an equally large and complex optical transport network featuring gear from one of the other large systems vendors.  This is real world.  So in literally ALL Cisco deployments, as well as Juniper deployments, there is some form of cooperation or "joint venture" wether formal or ad hoc just to get the carrier deal done between the router vendor and the transport vendor.  Juniper being formally linked with NSN is only one part of this particular interlinking between vendors for real world deployments.  


Of course market and market share is not based solely on technology.


Sailboat

Photon_Got_Mad 12/5/2012 | 3:59:14 PM
re: Is Juniper Junior-Grade? forget about Juniper missing a product in LH-POT area, can someone tell me which other vendor (both optical and IP router vendor) has a better position and product in this space that meets the requirement in cost and scale??? I bet there is none. Not Cisco, not ALU, not NT, not Ericsson ... So I don't why the guy only comment on Juniper. If such a "GOD BOX" will eliminate the deployment of more routers, it is more of all router vendors --especially Cisco.
Honestly 12/5/2012 | 3:59:15 PM
re: Is Juniper Junior-Grade?



<div>

Craig, so guys like this identify a potentially important market like P-OTS and hammer a company like Juniper for potential product shortfall in that market. &nbsp;Please have him or qualify the timing for P-OTS, market expectations for it, etc. &nbsp;Juniper has really been stellar in the core and in meeting carrier need for HOW long.? &nbsp;Zabitsky does not know what Juniper management and its engineering have planned, I doubt that many do, it is just Junipers style, like it, or not. &nbsp;I challenge you to look at Junipers next two earnings calls and see where the company is. &nbsp;Zabitsky is a Wall ST guy betting on potential market size and strategy for P-OTS and I am willing to bet he is so wrong because at the end of the day he is NOT a carrier technologist. &nbsp;He is simply grandstanding to get PR for himself and his position. &nbsp;Also, is he bullish CSCO?, he may have other agenda's. Watch Juniper exceed his guidance, sorry, I could not refuse using the G word.

</div>



Honestly 12/5/2012 | 3:59:15 PM
re: Is Juniper Junior-Grade?



<div>

Craig, so guys like this identify a potentially important market like P-OTS and hammer a company like Juniper for potential product shortfall in that market. &nbsp;Please have him or qualify the timing for P-OTS, market expectations for it, etc. &nbsp;Juniper has really been stellar in the core and in meeting carrier need for HOW long.? &nbsp;Zabitsky does not know what Juniper management and its engineering have planned, I doubt that many do, it is just Junipers style, like it, or not. &nbsp;I challenge you to look at Junipers next two earnings calls and see where the company is. &nbsp;Zabitsky is a Wall ST guy betting on potential market size and strategy for P-OTS and I am willing to bet he is so wrong because at the end of the day he is NOT a carrier technologist. &nbsp;He is simply grandstanding to get PR for himself and his position. &nbsp;Also, is he bullish CSCO?, he may have other agenda's. Watch Juniper exceed his guidance, sorry, I could not refuse using the G word.

</div>



Honestly 12/5/2012 | 3:59:15 PM
re: Is Juniper Junior-Grade?



<div>

Craig, so guys like this identify a potentially important market like P-OTS and hammer a company like Juniper for potential product shortfall in that market. &nbsp;Please have him or qualify the timing for P-OTS, market expectations for it, etc. &nbsp;Juniper has really been stellar in the core and in meeting carrier need for HOW long.? &nbsp;Zabitsky does not know what Juniper management and its engineering have planned, I doubt that many do, it is just Junipers style, like it, or not. &nbsp;I challenge you to look at Junipers next two earnings calls and see where the company is. &nbsp;Zabitsky is a Wall ST guy betting on potential market size and strategy for P-OTS and I am willing to bet he is so wrong because at the end of the day he is NOT a carrier technologist. &nbsp;He is simply grandstanding to get PR for himself and his position. &nbsp;Also, is he bullish CSCO?, he may have other agenda's. Watch Juniper exceed his guidance, sorry, I could not refuse using the G word.

</div>



Pete Baldwin 12/5/2012 | 3:59:17 PM
re: Is Juniper Junior-Grade?

Well.... I think he did take those things into account.&nbsp; Certainly he acknowledged the enterprise momentum and the IBM relationship, when I spoke with him.


He just doesn't think they're enough to counter his two main points.&nbsp; First, from a subjective POV, Juniper's already passed his target price and is trading at a P/E he finds uncomfortable (around 30; Cisco's is more like 19).&nbsp; So he moved his rating accordingly rather than just raising his target price - that's fine.


Second, more importantly, he thinks Juniper is not well poised for a major product shift that will increase the importance of optical in the IP arena.


Zabitsky might end up being completely wrong, but it's a gutsy call made on something beyond "guidance" (have I mentioned how much I hate that word?), and he's brought up a point that I think is well worth discussing.

Honestly 12/5/2012 | 3:59:19 PM
re: Is Juniper Junior-Grade?

&nbsp;Zabitsky is looking at things he can rationallize his short on.&nbsp; He has failed to look at the IBM relationship, enterprise momentum and the historical strength of NSN.&nbsp; Juniper's PR/IR no comment attitude is nothing new and it is unimpressive (ever since Hechart left), but historically Juniper's numbers speak for themselves.


Zabitsky and his clients will get squeezed If they stay short for long.&nbsp; Wall St guys should stick to analysing numbers, it is all they know with exception of hyping, or hurting a name for their own benefit.

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