Juniper Networks Is Losing Partnerships And That's Not Good For The Stock

Morgan Stanley’s James Faucette believes Juniper Networks, Inc.’s (NYSE: JNPR) “shrinking partnerships make carrier architecture transitions increasingly difficult to bear,” while underinvesting increases risks “ahead of product cycle transitions.”

Faucette downgraded the rating on shares from Equal-weight to Underweight, while lowering the price target from $24 to $20.

Shrinking Partnerships

The analyst believes the loss of partnerships means the Juniper Networks would be left to face the expected headwinds to services margins alone.

“Capital scarcity and negotiating leverage will pressure services margins, favoring vendors that leverage other technology providers' services arms,” Faucette explained.

Underinvesting

In addition, the analyst pointed out that declining ROI indicates that competitive investments have continued to grow, while Juniper Networks has lowered opex to FY 2010 levels, as a response to activist involvement.

“Lowered investments were followed by share loss and declining product gross margins from pricing pressure. We think under investing increases the odds of difficult product cycle transitions,” Faucette went on to say.

In the meantime, Juniper Networks’ share price rallied following an earnings beat reported for Q3 and the increased Q4 guidance for EPS and sales.

For Q4, the company now expects adjusted EPS at $0.59-$0.65 on revenue of $1.35 billion, which is ahead of the consensus expectations.