Bruce,
Thanks for the references. Spent a big part of yesterday taking another look at JNPR's value and future. As you know, my major concern is/was what I consider Juniper's staggering P/S ratio. The last (and first) time I looked at them was was about 3-4 months ago, but it was hard for the "value" side of me to look seriously with such a huge number like that staring me in the face. However, yesterday I did find this interesting numerical tidbit:
Juniper Price/Sales ratio
Q1/98 Q2/98 Q3/98 Q4/98 Q1/99 Q2/99 Q3/99 Q4/99 Q1/'00 Q2/'00
P/S --- --- --- --- --- --- 151.57 171.55 263.56 90.98
My eyeballs had previously been fixed on the their annual P/S (171), but if you look at the most recent quarter P/S, it seems less pricey -- plus a nice (more like staggering) downward trend is suggested. So for the moment, my concerns turn away from their current valuation to their future opportunity -- namely the potential future value of the core-router market, and how big a market-share JNPR might capture.
The argument seems to center around the importance of the core-router market and whether it is/isn't a large and necessary component of Cisco's future. What I'm wondering is, if it IS important, then...
Until recently, it seems CSCO has remained mostly unchallenged, and allowed the luxury of picking the low-hanging watermelon. At first, (and I think of MSFT here as an example), gorillas seem mostly friendly, and use their market-dominance to develop their value-chain. But if seriously challenged, isn't this where a gorilla would flex it's dominance and then use that value-chain to protect it's turf? In the past, there hasn't been much need for Cisco to do this -- but that doesn't mean they can't -- or won't. Isn't that the nature of the beast?
And if it ISN'T, then...
Again, I start to wonder if there's enough pie there to justify JNPR's current valuations. I'm figuring Juniper needs about 5-7 billion of organic growth by FY2005 to justify their market-cap. (I think that's one number we pretty much agreed on.) But that would mean about a 3% haircut to CSCO's growth rate, and I can't imagine CSCO surrendering that much turf (or denying themselves that much growth opportunity) without a major battle.
I guess the point I'm trying to make is this...if the router market IS important to CSCO, then I suspect JNPR will have a jumbo fight on their hands with the mother of ALL gorillas in the near future. And if it ISN'T important, then it's probably over-valued. It seems like it has to be one way or the other.
And this brings up Avici (or some other nameless hot-box maker). Information on their router is at best sketchy --and only one customer to date -- Enron -- that I am aware of. But Enron field-tested Avici against both CSCO and Juniper, and at least claims the Avici router is far superior to that of Juniper's. (But Enron also has an equity stake in AVCI, so that takes something away from the endorsement.)
But if that's true, couldn't CSCO solve their Juniper problem with an AVCI-like acquisition? I figure if the DOJ allows JDSU to acquire ETEK & SDLI, then would they have a problem allowing CSCO to swallow a company with no market share and only 500K in revenue? (And these aren't rhetorical questions -- because I have no idea if true or not.)
And also, what about CSCO's R&D?...haven't checked their #'s, but I assume it's sizeable. And if JNPR's founders came from CSCO, then they must know these guys pretty well. And that makes me think CSCO must at least have something on their drawing board to allow them to compete. (And if nothing is in development, then I refer back to an acquisition as the solution.)
FWIW -- I feel a little more friendly about JNPR's potential, but I still wonder if peaceful co-existence is really possible. I guess what I'm looking for is why you think CSCO can't -- or won't -- hobble JNPR. I ask, because I know you own both companies -- so I doubt you have an axe to grind with either company.
td |
