Downgrade on Cisco rival shows warts

Goldman Sachs says "sell" Juniper stock based on routing, switching and security challenges

Goldman Sachs' downgrading of Juniper's stock this week indicates the myriad challenges facing the company in all of its key markets. The investment firm downgraded Juniper to a Sell from Neutral and lowered its price to $17 from $21 based on concerns in three of its major markets: service provider routing, enterprise and data center switching, and security.

In service provider routing, Goldman expects Juniper to be challenged by Alcatel-Lucent and its recent re-entry into core routing. The firm expects ALU's 7950 to impact Juniper's market share, and price and profit margins on its own core offerings.

Juniper and ALU have been trading the No. 2 spot in service provider edge routers for years behind Cisco. ALU is solidly No. 2 right now, with a 26% share of the $1.8 billion edge router market in Q4, 2012, compared to Juniper's 18% share, according to Dell'Oro Group.

[DEVIL IN THE DETAILS: Cisco vs. Juniper: How different are their SDN strategies?]

In core routing, Juniper is No. 2 to Cisco, followed by Huawei. But Juniper is vulnerable given that the core router market just experienced its fifth consecutive quarter of declines, according to Dell'Oro, and Juniper is undergoing a product transition to its T4000 router and PTX transport switch.

A Mini-Me of the PTX was just introduced by Juniper this week.

Goldman Sachs also expects Juniper's share of the switching market to flatten with the introduction of Cisco's Nexus 6000 and the "disruption" of software-defined networking. The Nexus 6000 is a low-latency 10G/40G switch aimed squarely at Juniper's QFabric, which has been a laggard after so much hype on its development.  The EX line, which is targeted predominantly at the campus, accounted for most of Juniper's switch growth in Q4, according to Dell'Oro.

Juniper share of the $5.5 billion Ethernet switch market in Q4 was 2.4%, the same as it was for all of 2012's $21 billion market, Dell'Oro notes.

In SDNs, Juniper just announced a comprehensive strategy that includes a new software licensing plan the company says will change its business model. It will shift its predominantly hardware-based revenue stream to more of a mixture of hardware and software, company officials say.

It also includes a plan to extract service software from network hardware and house it on commodity x86 servers. Goldman might think Juniper's own SDN strategy will disrupt the company more than the general industry wide trend.

Security has been challenging for Juniper for several quarters. In 2012, security sales in Juniper's Software Solutions Division were flat from 2011. In the Platform Systems Division, security sales were down 14.5%. On top of that, reports surfaced recently that Juniper tried selling off its NetScreen security business, which it acquired in 2004 for $4 billion.

Goldman expects "continued share loss on product feature gaps and the cannibalistic effect on sales from the transition to a software model" in security. Juniper's SDN plans include security services running as VMs on x86 servers; and it's already offering a cloud version of its SRX security gateway for branch offices, called JunosV Firefly.

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