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Aruba Networks Seems Cheap But Is There Value?

Management guided fourth-quarter EPS to come in at 11 cents on revenue of $149 million -- both below expectations. Analysts were looking for 17 cents per share (excluding items) on revenue of $157.1 million. There are a couple of ways to play this guidance, though.

Essentially management is calling for 38% year-over-year drop in earnings per share after the company earned 18 cents per share in the year-ago quarter. Likewise, revenue is expected to grow at only 7%, which would represent decelerated year-over-year growth of 15% and 5% sequentially. These numbers presume (relatively) no growth for the coming quarter.

It's entirely possible that management has created a worst case scenario and tossed everything out, including the kitchen sink, which can be brilliant, by the way. For example this is precisely what Apple (AAPL - Get Report) has done with its third-quarter guidance. For Aruba, though, I don't believe that the WLAN situation is this dire.

While I won't begrudge investors for having bailed on the stock, whether to lock gains or to cut their losses, this may prove later to have been an erratic move. For new investors, though, that are looking to "test Aruba's waters," the question to ask is, how much of Aruba's struggles has more to do with poor sales execution vs. the idea Aruba might be losing both market share and its "best of class" status.

In that regard, there are two major factors that investors have to consider. First, it's still unclear when enterprise IT spending will fully rebound. Although analysts are projecting a possible recovery in the second half of the year, recent earnings and/or a combination of earnings and guidance from enterprise players like IBM (IBM - Get Report) and Oracle (ORCL - Get Report) suggests that corporate leaders aren't feeling as optimistic.

The other issue is, even if the optimism were there and enterprise IT spending does rebound faster-than-expected, will WLAN be an important IT priority to the extent that interest in the bring-your-own-device (BYOD) market comprises of a meaningful enough portion of the expense budgets to matter to Aruba? The good news is that Cisco seems to thinks Cisco's efforts to build its WiFi capabilities.

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