Aruba Networks Is a Good Destination Pre-Earnings

NEW YORK (TheStreet) -- With better-than-expected results coming from Cisco (CSCO) and Rackspace (RAX), the Street seems more optimistic about mobile enterprise company Aruba Networks (ARUN) which will report third-quarter earnings Thursday.

There were doubts that the company could ever recover after a disappointing 2013 that saw its stock drop 14% due to threats from Cisco. But Aruba shares are up 11% in 2014. And not only has the company rebounded nicely, analysts are now convinced that the future is even brighter.

One in particular is Ashok Kumar, analyst at Imperial Capital. Kumar just initiated coverage on the stock with an Outperform rating and a price target of $23, which suggests 15% upside from current value of $19.90 (at 3:30 p.m.). In his research note, while pointing out that Aruba is second only to Cisco in double-digit market share in security, Kumar praised Aruba's innovative capabilities for enterprise networks.

I agree. For that matter, I don't believe Aruba's prospect is any rosier now than it were last year. As I've said recently, too much was being made of one quarter that sent investors into a frenzy. As any growth company, Aruba experienced some growing pains. But it certainly didn't warrant the punishment the company took. On Thursday, all of that should be a distant memory.

The Street will be looking for 20 cents in earnings per share on revenue of $180.8 million, which would represent a year-over-year revenue increase of 23%. Earnings, meanwhile, are projected to grow by 82%. For the full-year, analysts are calling for earnings of 76 cents per share, up, 21%. Full-year revenue calls for $706.4 million, up 18%.

Now these aren't shabby targets -- not by a long shot. In the February quarter, revenue advanced (just) 14% year over year. This means that growth is still accelerating. Even more impressive is that it's happening in a downbeat environment.

The company continues to benefit from its strong core of next-generation products, which accounts for over 80% of the Aruba's revenue. Product revenue grew roughly 8% in the recent quarter, which beat estimates by 5%.

Service revenue was slightly better, up 15% year over year. I don't expect much divergence on Thursday from these numbers. It's worth noting, however, that in February management cited a contract worth $2 million to implement a public-facing for an unnamed enterprise customer.

Assuming that this $2 million contract was a one-time deal, the service revenue may take a slight hit this quarter. But I'm going to trust that analysts are able to make this connection. But with the company's recent investments in sales and marketing, there's also a chance that any sequential weakness can offset with gains from unexpected areas.

The good news is, Aruba has seen the worst of this recent dry-spell and the company is back on solid footing. To the extent that Aruba has benefited from the recent enterprise shift from a fixed platform to wireless, there may also be an added upside surprise. And with shares still down more than 15% from their 52-week high, Aruba looks like a great destination ahead of earnings.

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


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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