2023-03-07 07:42:47 ET
Juniper Networks and Arista Networks ( NYSE: ANET ) were up fractionally in premarket trading on Tuesday as Goldman Sachs reinitiated coverage on several networking stocks.
Analyst Michael Ng, who took over for Rod Hall, put buy ratings on Arista Networks ( ANET ) and Juniper ( NYSE: JNPR ), while giving neutral ratings to Cisco Systems ( NASDAQ: CSCO ) and F5 Networks ( NASDAQ: FFIV ).
"Against the backdrop of downward consensus estimate revisions and slowing IT spending in 2022/23, we prefer networking equipment stocks that should benefit from cloud service provider data center investments driven by growing demand for public and hybrid cloud," Ng wrote in an investor note.
Ng also noted he prefers companies that benefit from a rise in enterprise digital transformation, have earnings visibility thanks to "healthy backlogs," have differentiated products and trade at "attractive" valuations relative to their peers and history.
Arista ( ANET ), which Ng has a $170 per-share price target on, is seen as "most levered" to the growth in cloud computing, but it trades at a premium valuation due to its importance to the hyperscalers.
"... Arista is well positioned to capitalize on the ongoing growth in data, the continued digital transformation driving workloads from on-premise to public and hybrid-cloud, and the growing demand for higher bandwidth, faster speed, and lower latency," Ng explained.
Juniper ( JNPR ) is likely to keep benefiting from the hybrid cloud, but it could also make headways into gaining more market share in the enterprise.
"In our view, we expect core underlying demand for JNPR products to be supported by secular trends (e.g., 400G, metro, software-based management platforms) and a re-focused enterprise strategy, though we recognize that tough comps & macro-driven budget scrutiny will be headwinds in the near term," Ng posited.
Ng put a $56 per-share price target on Cisco ( CSCO ), which he sees as a "market leader with revenue visibility," but also a company that is facing steep competition and at risk of losing market share.
"As a leading #1 or #2 incumbent in nearly every product type and category it participates in, [Cisco] has been subject to market share losses over the last decade, particularly to lower cost competitors (e.g., white box) and smaller, more nimble companies with specific vertical solutions (e.g., [Arista] in data center switching, [F5] in ADC)," Ng wrote.
However, Ng also noted that Cisco's ( CSCO ) "deep product backlog" of roughly $14B, compared to normal levels between $4B and $5B, should help the company grow revenue "beyond its normal range" in fiscal 2023 and into early fiscal 2024.
Ng has a $171 per-share price target on F5 ( FFIV ), pointing out it has "limited growth" in its legacy application delivery controller business, but it should benefit from a further push into adjacent markets such as security and application delivery.
"We expect F5 sales to grow 9% [year-over-year in fiscal 2023] with EPS growth of 13%, largely in-line with both consensus and company guidance, reflecting resilient systems demand and improving supply availability and slower growth in software due to macroeconomic headwinds that are resulting in software subscription shortfalls," Ng wrote.
Late last month, Bank of America mentioned Arista Networks ( ANET ) as one of fifteen stocks it expects to benefit from the rise of artificial intelligence .
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Juniper, Arista Networks rise as Goldman restarts coverage on networking stocks