Juniper (JNPR) reported Q4 earnings that were slightly above expectations, though the company’s Q1 guidance and commentary around 2020 led to the stock trading down ~7% after earnings. I think investors have gotten this name right, and I find it challenging for the stock to recover much in the near term.
Q4 revenue came in at $1.208 billion, which was a little above expectation for ~$1.2 billion and EPS beat by $0.01. Even with margins contracting once again, the company has done a good job repurchasing shares, thus lowering the share count and helping EPS.
However, the company’s Q1 guidance demonstrated soft revenue growth and EPS range that came in below expectations. Management also talked about 2020 on the conference call and indicated they were comfortable with current consensus revenue growth of 1% in addition to a goal of growing earnings. To me, this is rather disappointing guidance as investors likely expected some more detailed commentary around growth accelerating and EPS returning to more normalized growth.
Since reporting earnings, the company’s stock is down ~6%, which makes sense given the lack of growth expectations and weaker than expected guidance. With the company’s forward P/E ratio now ~13x, valuation appears to be somewhat attractive. However, when comparing to Cisco’s (CSCO) ~14.2x forward P/E, it seems like there is a ceiling on JNPR’s valuation.
Even though valuation seems to be cheap, I think this is a value trap and investors should stay away from the name for now. Even if the company returns to good growth in 2020, I find it challenging to believe the company’s forward P/E will expand much beyond 14x, if it even reaches that point.
JNPR appears to be a lower quality name when comparing them to their closest competitors, CSCO and Arista Networks (ANET), who have both done a better job over the past few years advancing their technology and better transitioning into a cloud-based infrastructure world.
Q4 Earnings and Guidance
JNPR reported Q3 revenue of $1.208 billion, which was slightly ahead of expectation for ~$1.2 billion. However, revenue growth continues to remain low, with only 2% growth during this quarter, continuing the trend of low single digit growth over the past several quarters.
The company’s operating margin came in at 20.3%, which contracted from 21.1% operating margin in the year-ago period. Expectations for margins have remained pretty low as the company continues to work their way through the slower growth period. EPS for the quarter was $0.58, which beat consensus expectations for $0.57. The biggest reason for the company continuing to beat EPS expectations is their continued share repurchases.
Source: Company Presentation
The biggest reason for the company’s revenue decline continues to come from routing, which saw revenue decline 5%. This revenue stream continues to remain under pressure and while representing only ~35% of revenue now, it makes it challenging for the overall company to grow revenue with such a large chunk declining 5%. Routing pressures have become common across the industry and have impacted competitors such as Cisco and Arista.
Switching and product revenue continue to drive the company’s growth. During the quarter, switching revenue grew 17%, which was the biggest driver behind growth. Security revenue seemed to lack a bit and decline ~3% compared to the year-ago period, despite the continued shift by enterprises to spend more on security-related products.
Source: Company Presentation
Not surprisingly, the company’s service provider revenue was the only vertical to decline in revenue. Companies continue to shift away from legacy technologies and rapidly adopt cloud-based approaches. This was evident by the company’s Cloud revenue growing ~18% during the quarter. Service Provider revenue will generally go in tandem with Routing revenue as enterprises are not looking to upgrade legacy hardware routing solutions anymore.
Source: Company Presentation
Q1 revenue is expected to be $1.00-1.06 billion, which would represent 0-6% growth for the quarter and was close to expectations for $1.04 billion. While gross margins are expected to remain okay at 58.5-60.5%, operating margins are expected to be 11.5% at the midpoint, which was below expectations. EPS is expected to be $0.24-0.30, which was below expectations for $0.32.
For the full year, management noted they are comfortable with consensus estimates for ~1% revenue growth in addition to seeing their earnings grow this year. While these are not concrete numbers, it does give the company flexibility to adjust expectations in future quarters.
Risks to JNPR include an overall slowdown in IT-related spending. If enterprises become less willing to spend on IT upgrades, there will be less demand for JNPR’s services. History shows there tends to be a bit of cyclicality with IT spending. When the economy slows down and enterprises begin to tighten their expense control, upgrading IT systems is usually not at the top of their lists.
In addition, JNPR could continue to face cloud segment challenges due to their concentration around larger contracts. Competition in the cloud segment continues to increase as there is a significant market opportunity. Enterprises are increasingly looking to shift to the cloud due to increased computing power and less need for on-premise hardware. If JNPR is not able to capture the potential upside from cloud customers, this could enable competitors to have a greater market opportunity.
Since reporting earnings last week, the stock has been down ~7%, which seems about right. The company continues to experience slow revenue growth and their Q1 expectations fell short of consensus estimates. Even though the company continues to shed some of their legacy revenue, the low growth and low margin profile make it challenging to get bullish on.
On the conference call, management noted they are comfortable with the current consensus revenue growth of ~1%. In addition, they noted they expect earnings to grow in 2020, which while growth is good, investors are looking for names with strong EPS growth.
Given the lack of strong growth expectations over the next year, I find it difficult to see the company’s P/E ratio expand much from here. When looking directly at CSCO, I see JNPR’s multiple continuing to trade lower. With the stock currently trading ~13x forward P/E, I think CSCO’s relatively valuation places a ceiling on where JNPR can trade. In addition, CSCO has a more diverse revenue stream which helps them better compete at the end market.
For now, given the company’s commentary around muted growth expectations for 2020, I find it challenging to see the stock get above the $25 range in the near term. Investors will look at both revenue and EPS growth in the low single digits and not see much potential for a beat and raise quarters. On a relative basis, CSCO’s forward P/E of ~14.2x seems to place a ceiling on where JNPR’s shares can trade. Even if JNPR’s EPS reaches $2.00 and their P/E multiple expands ~1 turn, this would only result in a $25 stock.
I remain on the sidelines and will wait another quarter or two until the company is able to better demonstrate consistent and meaningful revenue growth, margin expansion, and EPS growth. Even with valuation starting to look attractive on a standalone basis, I believe this could be a value trap that leaves investors feeling empty.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.