This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

After the Storm, Aruba Networks Rebuilds

Stocks in this article: ARUN CSCO JNPR

NEW YORK ( TheStreet) -- Back in June, shortly after Aruba Networks (ARUN - Get Report) was putting the pieces back together while recovering from "Hurricane Cisco" (CSCO - Get Report), I argued there was considerable value left in the stock. Too much was being made of a near-term hiccup. It wasn't a popular opinion. But it was a point that needed to be driven home.

I won't deny the legitimacy regarding concerns about Aruba's long-term health in the wireless local-area-network (WLAN) market. That Cisco owns more than 50% share of that industry is a big deal. But what transpired three months ago with Aruba losing as much as 44% of its value can only be described as pure panic selling and a gross overreaction. In the article in June I said the following:

"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 versus the idea Aruba might be losing both market share and its 'best of class' status."

I don't believe I received any support on this. Aruba's management, meanwhile, which then guided for fourth-quarter earnings to come in below expectations, certainly didn't help its case. Nor did it help my argument. But the downbeat guidance wasn't a surprise. It certainly wouldn't have made sense to set the company up to fail after a disastrous quarter. Since then, however, cooler heads have prevailed.

While shares of Aruba are still 40% below their 52-week high, the stock is up almost 35% since three months ago. Management only guided for 7% growth, which (among other reasons) caused the panic, since this would have represented 15% growth deceleration. But that was not to be. Instead, fourth-quarter revenue came in 10% higher year over year, which was enough to beat Street estimates.

What's more, not only did product revenue inch higher by 7% year over year, the company also beat gross margin expectations, which also led to a beat in operating income. Although every analysts was using the "Hurricane Cisco" headline back in May, I found no evidence this quarter that Aruba was under similar pricing pressure. In fact, it was Cisco, not Aruba, that suffered this quarter due to softer-than-expected margins.

For Aruba, which is working to build credibility, margins are always going to be an issue. Fairly or unfairly, Cisco's presence and its far-reaching capabilities is always going to be tied with Aruba's long-term prospects. Even so, I don't think we should assume that customers are going to willingly bypass Aruba's best-of-breed WiFi business, in favor of discounted alternatives.

Right now, given the tough IT spending environment, customers may look to save. But this level of underinvestment won't last indefinitely, not if enterprises truly care about competing.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,416.85 +225.48 1.31%
S&P 500 2,021.25 +19.09 0.95%
NASDAQ 4,683.4070 +45.4130 0.98%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs