Juniper: Needham Says Hold, Prefers F5 as Control Shifts

Needham & Co.‘s Alex Henderson this afternoon assumes coverage of Juniper Networks (JNPR), cutting the stock to Hold from Buy, writing that although it is a “solid company with respectable growth prospects,” he’s concerned Juniper’s profitability is threatened by broad changes in the networking industry, including more “virtual” aspects of equipment.

Henderson prefers F5 Networks (FFIV), which he initiated this afternoon with a Buy rating and a $130 price target.

First and foremost, it’s possible Juniper will see its success thus far in security products for networks usurped as more security functions move out of the “control plane” of routers and switches and into the application layers, he opines, which, if true, would play to the strengths of F5 and others:

However, we see these mature data plane segments changing rapidly and Juniper appears to be modestly behind in this transition. Over the last several years, the security threats had moved dramatically from the data plane to the application layer where today over 80% of the attacks occur. The Next Generation-Firewall Wall (NG-FW) is emerging to address this developing threat-scape, and we see companies such as CheckPoint (Buy, covered by Needham analyst Scott Zeller), Palo Alto Networks, and SourceFire (Buy, also covered by Scott Zeller) addressing this arena more rapidly than Juniper, and new security players such as F5 Networks with its deep application layer skills are becoming increasingly competitive. Juniper is likely to reposition in this arena and has the potential to be strong in the emerging Data Center core Virtual Security market. However, over the near term, we think they have some pressures to deal with and investments to make.

In addition, Henderson sees Alcatel-Lucent‘s (ALU) recent entry into the service provider router market as a credible threat to Juniper:

Alcatel-Lucent has put the service provider router market in its strategy gun sights. It has successfully entered the edge and metro core router markets and now is launching in the core router market. We think Alcatel�s products look competitive with those of Cisco and Juniper. We also think they are competitive enough to allow service providers to wield the ALU offering as a threat in agitating for lower prices.

As for F5, the company is the best way, he thinks, to ride the shift in emphasis from the control plane to the application layer:

In our opinion, the value in Networking is moving up the IP stack to the Application Layer. As enterprises and service providers move to cloud and SaaS, managing services becomes dramatically more important than managing infrastructure. F5�s dominant position as the premier Application Layer control plane company gives it unique opportunities for sustained growth, in our view. Over time, we believe F5 becomes increasingly mission-critical to the success of virtualization, desktop virtualization (VDI), application security and the delivery of cloud services.

Juniper shares today closed up 48 cents, or almost 3%, at $17.48, while F5 shares were up $2.38, or 2.4%, at $103.27.