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The Magic Word in Tech Is 'Routers'

Hardware: Juniper Networks and other upstart makers of Web and data-network switching devices are invading Cisco's turf.

October 16, 2000|JAMES F. PELTZ

Stocks aren't fun now? Don't tell that to investors of Juniper Networks Inc. and some other fast-growing makers of Internet and data-network switching equipment and related hardware.

The stocks of Juniper, Extreme Networks Inc. and Network Appliance Inc. are on fire, and they all surged again Friday. They're rallying not only because demand for Internet switching gear--or "routers" as they're called--and other network systems is so stout, but also because Juniper and the others are posting exceptional growth rates.

And in the case of Juniper, it's getting added notoriety because it's aggressively taking market share from the king of the industry for high-end Internet routers, Cisco Systems Inc., and it's also profitable.

"Juniper has produced one of the most impressive revenue-growth track records of any company in technology," analyst Paul Johnson of the brokerage Robertson Stephens in San Francisco said in a bulletin to clients Friday.

Chet White, an analyst at the investment firm First Security Van Kasper in Los Angeles, said, "What you have is one of the fastest-growing markets we've ever seen, accompanied by [Juniper's] taking market share, and that makes one of the most powerful stories in the Internet-structure market."

Indeed, it's an abrupt change from the past, when it was Cisco's stock that kept doubling over and over again almost regardless of how the overall stock market fared. That's because Cisco itself was bursting in size as it came to dominate the router business for moving traffic across the exploding Internet.

Now, it's Cisco's stock that's languishing while shares of Juniper and others keep rallying. So far this year, Cisco's stock is up a modest 5%, while Juniper has quadrupled in price. Extreme Networks' stock has more than doubled year to date, and Network Appliance shares have nearly tripled.

Juniper's stock soared $28.89 a share Friday, to $228.50, on Nasdaq. The stock is now in the stratosphere, selling for 752 times the earnings per share that the Sunnyvale, Calif., company is expected to report for this year. Juniper's overall stock market value is now $72 billion.

Juniper fueled investors' excitement Thursday by announcing third-quarter results that far exceeded Wall Street's forecasts. The company introduced its first high-end Internet router products two years ago, and they instantly found a market because "they started out ahead of [Cisco's] in terms of their technology, both hardware and software, and they've been able to maintain that lead," White said.

As of this summer, Juniper's machines--which can cost $200,000 or more--had grabbed about 25% of a market that Cisco had once completely dominated, "and I would assume they're up to the 27% range," White added. The overall market for such equipment is now about $2 billion to $3 billion, but that figure is expected to soar to the $10-billion-to-$12-billion range by 2003, he said.

To underline its growth, Juniper told analysts Thursday that it now expects its revenue this year to reach between $625 million to $640 million, up from its previous forecast of $515 million to $520 million. (Cisco's revenue, by comparison, is expected to hit $22 billion for 2000.)

Juniper also said its third-quarter profit--excluding one-time gains and charges--totaled $60.3 million, well above what Wall Street expected and more than double the $28.6-million profit a year earlier.

Not all of the networking stocks have joined in this year's rally, however. Shares of Sycamore Networks Inc.--which makes products for fiber-optic data networks--have dropped 17% so far this year, despite recovering $8.48, to $85.48 a share, on Friday. But the stock remains well above the price at its initial public offering a year ago, which was $12.67 a share after adjusting for a subsequent split.

Likewise, Foundry Networks Inc.'s stock has plummeted from its peak of last March, when it briefly topped $200 a share before being caught up in the "tech wreck" that began that month. But Foundry, too, remains well above its split-adjusted initial offering price of $12.50 a share in September 1999.

Foundry competes with Extreme Networks to sell switches for "local-area" data networks, typically used by a single corporation, as opposed to the "wide-area" switches for the Internet made by Cisco and Juniper, said analyst Erik Suppiger of the investment firm Chase H&Q in San Francisco.

This year, "Extreme has done a couple of things to improve its position," he said, such as absorbing "a lot of 3Com's sales force after 3Com discontinued" one of its switching products, generating new sales for Extreme. Also, Extreme has rolled out new products of its own that have been well-received, Suppiger said.

As for Juniper's invasion of Cisco's turf, Suppiger said there's no denying the market share that Cisco has lost, but the router market keeps growing so fast that "there is a lot of market share available."

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