by Susan J. Aluise | October 24, 2012 1:25 pm
We’ve heard all the hot buzzwords: cloud, virtualization, BYOD, Big Data.
Big deal. Putting the buzz before the business case can lead to big disappointments in tech stocks, as early Facebook (NASDAQ:FB) IPO investors might have told you.
But investors risk leaving money on the table by being quick to bail on tech companies with a compelling business case, just because their stocks have taken a few hits. Consider three cloud/virtualization stocks that have had a tough go of it in recent weeks: VMware (NYSE:VMW), Juniper Networks (NYSE:JNPR) and Citrix Systems (NASDAQ:CTXS).
Blame the laggardly performance of these three cloud and virtualization stocks on a sluggish economy and weaker demand for networking equipment by telecom carriers and other service providers. Slower-than-hoped-for growth in server virtualization and cloud technology spends by government and enterprise users haven’t helped either.
But we can take away a little hope from an unlikely source: a 20th century transportation planning concept known as the “Law of Induced Demand” — the idea that when you build or upgrade roads to reduce congestion, traffic will expand to fill those bigger, better roads.
What’s true for the interstate system also applies to digital superhighways — the greater speed and bandwidth you have, the more speed and bandwidth you need. Trends like cloud computing, Big Data, storage and server virtualization and more will cause global data center traffic to quadruple between now and 2016, according to a study released by Cisco (NASDAQ:CSCO) this week.
Today’s digital highways aren’t big enough or fast enough to get the job done, and traffic congestion will only get worse. Telecom carriers and service providers need the speed and bandwidth to offer new services to their customers, and cloud solutions offer dramatic cost savings and business benefits to enterprise customers and government agencies.
That’s why these three tech stocks are well positioned to take advantage of these trends. Here’s a look at each:
VMW, which is majority-owned by storage giant EMC (NYSE:EMC), is a dominant player in the server virtualization market, which lays the groundwork for cloud computing. Although the market for products that enable multiple servers to run on a single piece of hardware is maturing, VMW is branching out with its new vCloud Suite software-defined network offering, which integrates virtualized computing, network, storage and management into one suite. The company’s $1.26 billion acquisition of SDN provider Nicira this summer makes VMW even less reliant on its partnership with Cisco.
In July, VMware and EMC played musical chairs in the C-Suite; InvestorPlace’s Tom Taulli breaks down the implications of the personnel moves in detail here.
VMW has shed 12% in the past month and is barely treading water year-to-date. It was up 4% Wednesday on an earnings beat, and on news that the company had named former Microsoft (NASDAQ:MSFT) VP and Skype CFO Jonathan Chadwick as its new head of finance. VMW is a bit frothy, sporting a forward price-to-earnings ratio of 27 and a price/earnings-to-growth ratio of 1.4, but I still think there’s a lot of upside for this stock — particularly in the second half of next year.
JNPR, the second-largest manufacturer of networking routers and switches behind Cisco, has struggled for several quarters because of frugal telecom carrier and service provider customers. A weak earnings announcement pushed down JNPR shares more than 8% to around $16 by midday Wednesday. But although strong headwinds remain in the short term — particularly in Europe — service provider networks need major technology upgrades to meet skyrocketing customer demand.
For example, Verizon (NYSE:VZ) this summer tapped Juniper’s advanced PTX5000 platform to upgrade its high-performance carrier network. Next year, Verizon plans to use the JNPR platform to support its wireless, Ethernet and cloud services. Although Juniper faces increased competition from CSCO, it has taken action to cut costs and has laid off 5% of its work force — a move that could save as much as $150 million in operating expenses next year. Several prominent executives have left the company in recent weeks, but I think the company can retain its focus.
JNPR shares have declined 20% year-to-date, resulting in a fairly attractive forward P/E of less than 15, though its PEG of 1.65 is higher than I’d like. Rumors surfaced earlier this month that Juniper might be putting itself on the block — with one bid in the high $20s — and that EMC could be a potential suitor. That would be a monster premium for JNPR, which is trading around $16.50, but the ability for EMC to add the critical networking piece to its vertically integrated solution strategy could be worth it.
Citrix’s edge lies in its strong desktop virtualization platform, which allows users to use a wide range of devices — laptops, tablets or smartphones — to access data and run programs, applications and processes off a centralized server. Through a partnership with Cisco, Citrix also offers an advanced cloud network platform.
Partnerships have long been a critical component of Citrix’s success. The company’s new Receiver and Xen Client software cashes in on the BYOD trend by enabling companies to support employee-owned devices, including those based on Apple’s (NASDAQ:AAPL) iOS and Google’s Android. The Citrix Receiver offering also will be available on Windows 8 tablets and laptops.
CTXS has lost more than 20% of its value in just a month, bringing it to a roughly 6% gain YTD. The stock also is a little expensive at a forward P/E of 20 and a PEG of 1.3. Still, this is a company that really stands to gain from growth in mobility and BYOD. Don’t rule out a tighter alliance with Cisco, either — a move that could enhance both companies’ fortunes in this high-margin space.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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