EUR 850.00 For Business Accounts Only

Morningstar | Juniper's Competitive Positioning Makes Us Cautious; Lowering FVE to $22. See Updated Analyst Note from 15 Feb 2019

Juniper Networks is pivoting toward software and enterprises for growth, but we expect industry stalwarts to fiercely challenge greenfield opportunities. While we see bright spots in Juniper's software-defined networking platform, security, and services offerings, we are concerned about its portfolio gaps and ability to leapfrog competitors' innovations. We lowered our moat rating to no-moat from narrow as we opine that Juniper cannot durably create excess economic returns above its cost of capital. For this high uncertainty name, we are lowering our fair value estimate to $22 per share from $26.

We believe fundamental shifts in networking technology forced Juniper to pivot its strategy toward software-defined networking alongside solutions that appease a broader customer base. Sales to the service provider market represents slightly less than half of Juniper's total income. Through its Contrail software platform and proprietary chip technology offerings, we believe Juniper should benefit from 5G networks requiring higher capacity routing capabilities alongside software-based management. However, Juniper relies on an Ericsson partnership for its presence within the mobile market, and we believe that antenna and software systems will determine the 5G buying decision.

In our view, Juniper's product refreshes and networkwide management software has put it on the short list for enterprises considering networking merchants. Juniper relies on collaborations to fill portfolio gaps in areas such as wireless and hyperconverged infrastructure, which may hurt its presence with customers consolidating vendors. Juniper revamped its cloud vertical product strategy to strip out extraneous features that the tech-savvy cloud customers did not require and focused on software development for the wide-area network. We posit the next wave of Ethernet speed will create greenfield opportunities for Juniper, but we expect industry peers to also remain leaders on the innovation curve.

We believe that the lines between siloed networking solutions are blurring and Juniper can benefit from weaving distinct vertical innovations together into a holistic offering for hybrid-clouds. As cloud-based processing expands closer to the end users, increasing management complexity, and hyperscale cloud providers continue to use white-box solutions for basic tasks, we believe Juniper's software prowess will determine its ultimate success in this market.

In our view, Juniper's revenue should remain relatively flat through our explicit forecast period as we model a 4% revenue decline in 2019 followed by slight revenue growth throughout 2023. We expect a challenging environment within the cloud segment to offset potential growth from enterprises in the near term. In our view, Juniper's push to offer software-based solutions and security alongside its legacy platforms could be appealing to enterprises looking to consolidate their vendors. We believe that 5G network buildouts from service providers and the 400Gb networking speed adoption by cloud customers are future growth catalysts. As cloud vendors continue to expand their network edge presence, a common platform vendor, like Juniper, may be preferred for management commonality. Overall, we expect competitive spending environments to limit Juniper's total growth.

We model operating margin expanding beyond 14% in 2023 compared with 12.5% in 2018. The expansion mainly comes from gross margin increasing toward 61% versus 59% in 2018 as we expect a larger portion of software sales to favorably impact product costs. In our view, Juniper's operating expenditures will remain relatively consistent across our explicit forecast period, as we expect sales and marketing to remain around 20% of revenue with research and development hovering slightly higher than 20% of sales.