There’s new research from IDC that paints a bullish picture for Juniper Networks (JNPR). The report shows ethernet switch data from Q3, where Juniper’s switch business looked particularly impressive.
However, looking ahead, there’s not much to be excited about for JNPR, and for those wanting an ethernet switch investment play, go with the safer Cisco (CSCO) stock.
What Data?
The Q3 ethernet market stood at $6.1 billion according to IDC, which was flat compared to the same period last year. The two bright spots were the 10 Gbps and 40 Gbps ports, with shipments rising 27.4% and 41.4%, respectively.
The 40 Gbps ports account for more than 10% of the entire ethernet market, which suggests its performance accounted for all of the market’s growth.
These are two port areas where Juniper excels, thereby explaining the nearly 40% growth it saw in Q3. However, a lot has happened since then, and chances are, JNPR will have a hard time gaining market share and growing in the IP switching and routing industries for some time to come.
Two Big Events Causing Problems for JNPR
First, there is Nokia’s (NOK) acquisition of Alcatel-Lucent (ALU). The latter is a JNPR competitor in routing and to a lesser degree switching. ALU has had the fastest-growing routing business for the last five years, and is showing no signs of slowing down. However, the bigger problem from this acquisition is that ALU gives NOK a router and switch supplier.
In the past, NOK and JNPR worked together, where Nokia sold Juniper products to customers in need of routers and switches. After the acquisition, Nokia will be selling its own ALU products, which means that JNPR will lose business.
Second, CSCO is partnering with Ericsson (ERIC), much like the NOK and ALU merger. CSCO believes it will create a billion dollars in new revenue as a result of this partnership. This means CSCO and ERIC expect market share gains, which is never good for a small competitor like JNPR.
Cisco Stock Looks Far Superior to JNPR
Clearly, JNPR faces a lot of adversity in the year ahead, with two big mergers/partnerships in its industry. The problem is that JNPR is still a somewhat small telecom equipment supplier, one that could face turmoil as a result of this consolidation.
Mainly, JNPR owns just over 3% of the ethernet switching industry, and a low double-digit share of the routing market. Meanwhile, CSCO has a 60%-plus share of the switching market, and also a leading share in routing.
That said, the switching industry is a monopoly, owned by CSCO with its next closest competitor having a market share of less than 10%. The routing space is a bit more fragmented, but still, CSCO dominates both industries with an ecosystem that is unchallenged, having pricing power along with the top products in each ethernet category.
Buy Cisco Stock Instead
Over the last five years, JNPR has been a top choice of investors who think that CSCO can be challenged. Maybe it can, but if so it will be ALU and NOK causing problems, not the partnerless JNPR.
Nevertheless, Cisco stock remains the best play on telecom equipment, paying a 3.2% dividend yield and trading at less than 11 times next year’s earnings. Now that CSCO has its partnership with ERIC in place, which should create new opportunities, Cisco stock is that much more attractive.
The bottom line: Stick with Cisco stock! Don’t bet on JNPR.
As of this writing, Brian Nichols owned shares of NOK and CSCO stock.
