Juniper's Risks Outweigh Its Reward

NEW YORK (TheStreet) -- Investors often boast about "having conviction" in the stock market, or the "confidence" and "certainty" that you've made the right bet. However, confidence becomes stubbornness at a certain point. This is where investors of Juniper Networks (JNPR) must draw the line.

Through documents filed by the Securities and Exchange Commission, Juniper investors learned last week that activist investor Elliott Management upped its stake in the beleaguered network giant to 6.2%. Immediately thereafter, Juniper stock soared more than 10%, to reach a new 52-week high. This is an overreaction.

I realize there's been plenty of "buzz" surrounding companies overtaken by prominent activists. Not afraid to go after the lackluster Apples (AAPL) and Herbalifes (HERB), corporate raiders such as Carl Icahn and Bill Ackman are notorious for making executives "uncomfortable." And in some cases, they've shaken boardrooms until their demands were granted -- typically these include stock repurchases and higher dividend payouts.

[Read: Juniper Hits Overbought Territory]

To that end, Elliott Management believes it has a solution to get Juniper stock trading higher by close to 60%. These actions include (among other things) a share buyback program worth an estimated $3.5 billion, a quarterly dividend at 12.5 cents per share (Juniper has no current payout) and a $200 million run-rate reduction in operating expenses from 2013.

While I do believe these are reasonable requests, Juniper investors shouldn't get carried away here. Instead, what this company needs is better execution. All of Juniper's "promise" has yet to turn into real tangible growth. As the company has become a perpetual laggard behind market leader Cisco (CSCO), the Street has been waiting (at least) five years for things to turnaround. And we're now at the point where investors must realize that patience should come with some limits.

Juniper will announces its fourth-quarter results on Thursday. The Street will be looking for earnings of 37 cents per share on revenue of $1.22 billion, which would represent year-over-year revenue growth of 7.2%. I expect analysts will also clamor for details related to Elliott Management's overtures.

That said, given all of the changes taking place at the company since the arrival of new CEO Shaygan Kheradpir, the company's numbers will and should be secondary. The main driver of the stock will be the direction of the company as described by management and any possible signs of life presumed within the stated guidance.

It will also be encouraging if the company can outline ways to lessen its dependency on carriers and better diversify its product/service portfolio. It's not good that more than two-thirds of Juniper's revenue comes from the likes of Verizon (VZ) and AT&T (T).

It's true that this sector has often traded in tandem. That doesn't, however, mean that the challenges one company faces transfer to the others. I will grant that poor carrier spending has taken a significant toll on Juniper's business. Cisco, on the other hand, has found ways to mitigate the damage. Same goes for Ciena (CIEN) and Adtran (ADTN).

[Read: Elliott Management Swings for Juniper in Tech Shakeup]

The other thing that bothers me is that Juniper, unlike Cisco, has much less exposure to enterprise customers. Although the company has launched several new products aimed at growing revenue, sales figures haven't been impressive.

The good news is that Juniper continues to explore ways to grow its security business to offset declining demand in traditional routing and switching, which has become more software based. And I'm also pleased with new management's focus on profitability and cost management, which -- I believe -- will help boost long-term gross margin and profits.

There are still several big unknowns, however. Although there are signs that carriers are more willing to spend, questions remain about Juniper's future. For instance, there have been several reports about the company trying -- unsuccessfully -- to sell off some of its assets to rivals, including Cisco. This has raised concerns among customers about Juniper's long-term commitment. Customers won't buy hardware without some assurances the company will be around to offer support.

For now, I don't feel strongly enough about Juniper to recommend the stock. This is even if Elliott Management is granted some (or all) of its demands. In a space dominated by better-managed companies like Cisco and Ciena, there are still execution risks in Juniper that can't be ignored. And it remains a challenge to find a glass-half-full scenario here.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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