Shares of Cisco Systems (CSCO) are trading lower today in sympathy with Juniper Networks (JNPR), which pre-announced disappointing first-quarter results after the close on Monday. We are not surprised that the bad news is dragging the broader data networking group lower, and while we do not discount near-term risks around weak Enterprise spending, we view Action Alerts PLUS holding Cisco as a differentiated, diversified asset that is well positioned to absorb any transitory or secular weakness, given its mix shift to high-growth, high-margin areas such as software, cloud and collaboration.
After the close on Monday, Juniper lowered its revenue and earnings guidance for 1Q, attributing the expected miss to weaker-than- anticipated demand in the Enterprises segment and delayed deals with U.S. and European Tier 1 service providers. Juniper has struggled to diversify its business outside of legacy assets associated with mature, "old-tech" markets, and as a result is tethered to any transitory or secular decline in Enterprise switching & routing.
Within these verticals, the company faces increasing competition and strategic isolation. In routing, the company is losing share to Cisco and its partner Ericsson (ERIC) and Nokia (NOK)/Alcatel- Lucent (ALU). In the absence of a strategic partner, Juniper has struggled to scale effectively and compete on pricing.
In switching, the company is losing share in campus networking as it lacks a strong WLAN partner (which underpins a campus' wireless network). Finally, the company's data center operations are being pressured by Arista Networks (ANET), Cisco and the proliferation of white-box devices (which are low-priced, bare-bones, alternatives to traditional switching).
Meanwhile, Juniper is struggling to gain traction in security -- which is unsurprising, considering the company announced in December that its operating system firewall had been compromised, leveling a serious blow to its credibility.
All in, while we do not intend to discount the implication of Juniper's pre-announcement as it relates to high-level Enterprise trends (which suggest networking end markets remain weak), we would highlight two distinguishing factors between Juniper and AAP portfolio holding, Cisco:
1. Within routing, Juniper's product cycle is in its late innings, while Cisco's product cycle is scaling -- meaning the leap-frog effect in market momentum could be tilting to Cisco's advantage;
2. Cisco is rapidly transforming from an "old-tech" business (routing & switching) to a systems business: A multi-platform company with accelerating software and recurring revenue streams in major categories, including data-center switching, security, and collaboration. We believe the company's strategic focus on next-gen security, cloud infrastructure, automation software, Internet of Things, and broader collaboration provides multiple long-term tailwinds.
Cisco's mix shift toward software -- which has boosted deferred revenue and lifted operating margins -- should fuel earnings and multiple expansion long-term, while its powerful capital return program (marked by a $15 billion share buyback and industry-high 3.8% dividend yield) pays investors for their interim patience.
We reiterate our $30 price target, and while we would not be surprised to see transitory weakness in legacy end-markets in the company's upcoming quarter, we reiterate our high conviction thesis over the long- term.