Nomura Says It's Time To Buy Communication Equipment Stocks, Comments On 5 Companies

In a report published Tuesday, Nomura analyst Jeffrey Kvaal initiated coverage of the communication equipment sector, noting that "modest" industry growth understates the "turbulence" within the market.

"Pockets of rapid growth, market share shifts, and new end customers offer much opportunity for investors," Kvaal wrote. "We prefer the stocks with the most exposure to the fastest growing new customer set, the data center market."

Kvaal said that companies such as Google Inc GOOG GOOGL and Amazon.com, Inc. AMZN are expanding its capital expenditure budgets on networking gear two to three times faster than traditional players. In addition, a survey of the capital expenditure of six top purchasers likely understates the growth at 9 percent.

Ciena: ‘Insurgent' Optical Play

Kvaal initiated coverage of Ciena Corporation CIEN with a Buy rating and $29 price target as the 100G optical cycle and rising demand from non-telco will result in "healthy" growth within the $10 billion optical market.

The company's rising mix of higher martin metro optical revenue should help the company achieve "at least study" gross margins over the coming years while offering an opportunity to expand operating margin.

Arista: Defensible Niche

Kvaal initiated coverage of Arista Networks Inc ANET with a Buy rating and $79 price target given an expected 8 percent annual growth over the next five years in the $8 billion-plus data center switching market.

According to the analyst's checks, Arista is "increasingly successful" outside of its traditional customers such as insurance and health care verticals.

Cisco: Taking A Breather

Kvaal initiated coverage of Cisco Systems, Inc. CSCO with a Neutral rating and $32 price target as the company's core enterprise networking and carrier equipment markets are expected to grow only at a "modest" 3 to 5 percent.

The analyst added that while Cisco could fare "slightly better" in the near-term by expanding into new markets where it doesn't hold a dominating market share (security, optical) it will be a winner over time in adjacent markets such as servers, storage and analytics.

Jupiter: Lack Of Confidence

Kvaal initiated coverage of Juniper Networks, Inc. JNPR with a Neutral rating and $28 price target as the analyst is not yet willing to grant success to a new roster of routing products as routing refreshes have not traditionally driven sustainable market share gains.

F5: Security Not Yet Enough

Kvaal initiated coverage of F5 Networks, Inc. FFIV with a Neutral rating and $118 price target as the company's security division is expanding at 30 to 40 percent annually but only contributes 10 to 15 percent of revenue. On the other hand, the ADC market has decelerated toward a mid-single digit growth rate.

The analyst added that the company's recent soft performance is attributed towards a mix of cyclical and structural factors that the company is not likely to see a 15 to 20 percent growth rate again.