Weak Product Demand Could Weigh On Juniper Networks Stock

Juniper Networks stock (NYSE: JNPR) is up only around 4% since the beginning of 2020, but at the current price of around $25.50 per share, we believe that Juniper Networks stock has around 15% potential downside.

Why is that? Our belief stems from the fact that JNPR stock is up almost 1.5x from the low seen in March 2020. Further, after posting weak Q4 ’20 numbers, it’s clear that Juniper did not benefit from the pandemic as expected, and that networking product demand has still not fully recovered to pre-pandemic levels. Our dashboard What Factors Drove -10% Change In Juniper Networks Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Juniper stock’s drop since late 2017 came due to a 12% drop in revenues, from $5 billion in 2017 to $4.45 billion in 2020. Net income margins dropped from 6.1% to 5.8% over the same period, as a result of rising costs. This, combined with a roughly 12% drop in the outstanding share count, led to EPS dropping by 4%, from $0.81 to $0.78 over this period.

Juniper Networks’ P/E (price-to-earnings) ratio dropped from 35x in 2017 to 29x by 2020 end, but has risen to 33x currently, as the investor expectations surrounding networking product demand rose, implying a rise in demand and selling prices. However, given Juniper Networks’ weak Q4 2021 results, there is possible downside risk for Juniper’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns have led to a surge in online activity, which should have driven up demand for networking products, such as routers, switches, and security products, but this has not been the case with Juniper Networks. This is evident from Juniper’s Q4 2020 results, where revenue came in at $4.5 billion, at the same level as that in FY 2019. Further, the company was unable to control COGS and operating expenses, with operating income dropping to $353 million vs $442 million in FY 2019. Despite a lower effective tax rate (3% in 2020 vs 16.7% in 2019), EPS came in at $0.78, down from $1.01 in FY 2019.

Regardless, if there isn’t evidence of containment of the virus anytime soon, demand for the company’s products will remain stagnant in the near to medium term, and if the company is not able to control expenses, we believe the stock will see its P/E multiple decline from the current level of 33x to around 30x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $21, a downside of around 15% from the current price around $25.

While Juniper Networks stock does not seem attractive currently, 2020 has created many pricing discontinuities which can offer further trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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