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As cloud computing evolves and the “metaverse” becomes a tech industry buzzword, network gear makers find themselves once again basking in the spotlight. It’s not exactly the networking bonanza of the late 1990s, but big-name tech stocks like Cisco, Juniper and Arista are once again grabbing investors’ attention.
These major networking players — formally known as Cisco Systems (CSCO), Juniper Networks (JNPR) and Arista Networks (ANET), along with Extreme Networks (EXTR) — have easily outperformed the Nasdaq composite’s 20% gain for 2021. A couple have doubled in value or come within earshot of it.
One reason is the computer networking sector may have shaken off the worst of its “white-box” competition. That’s when Asian manufacturers build low-priced products with commodity components. Instead, the network gear makers are bringing to market next-generation products that command higher profit margins.
“In a nutshell, networking is sexy again,” Juniper Executive Vice President Marcus Jewell said at a recent financial conference.
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Tech stocks in the IBD Computer Networking group, collectively, have gained almost 64% since the start of the year. The group currently ranks No. 7, based on various factors, including six-month price performance, out of 197 industries tracked by IBD.
Cisco stock is up more than 37% this year while JNPR stock has gained more than 50%. Arista stock has nearly doubled since the start of the year, up 92%. And Extreme Networks has rallied 108%.
On a technical basis, Juniper stock and Extreme stock remain extended above breakouts as the overall market gyrates. Arista stock is toggling over and under a buy point.
And Cisco stock, a Dow Jones component, sits near the top of a buy range after a post-earnings breakout. The acquisition-savvy tech industry giant aims to increase recurring revenue from subscription-based software and services, while shifting away from its core business of selling network switches and routers.
Juniper underwent massive transformation with acquisitions of Mist Systems, Apstra, 128 Technologies and Netrounds — all since March 2019. Meanwhile, Arista has expanded into new markets with purchases of BigSwitch Networks, Awake Security and Mojo Networks over the past three years.
Then there’s Extreme Networks. It bought Aerohive in 2019 and more recently Ipanema.
With the acquisitions, analysts say, these tech stocks are better positioned as cloud computing evolves.
Hybrid Cloud Computing
Many U.S. cloud-client companies plan to stick with a hybrid cloud computing model. There, they utilize both their own on-premise data centers and remote cloud services. In some industries, applications need to stay on-premise for regulatory or security reasons. Container technology plays a role in the shift to hybrid clouds.
Many U.S. companies also plan to use multiple cloud computing service providers, not just one. That gives them more bargaining power, and flexibility in moving business workloads to the cloud.
Amazon.com‘s (AMZN) Amazon Web Services, Microsoft (MSFT) Azure, and the Google Compute Platform of Alphabet (GOOGL) are the three biggest cloud computing vendors. But Juniper stock is getting a boost as IBM (IBM) and Oracle (ORCL) also add cloud computing customers.
Computer network management is getting more complex as enterprises move to hybrid and multi-cloud infrastructure, analysts say. That has opened up opportunities for industry incumbents such as VMware (VMW) and Cisco, which acquired AppDynamics in 2017.
Arista and Juniper moved into the on-premise/multi-cloud management space with the acquisitions of BigSwitch and Apstra, respectively. Morgan Stanley expects competition to heat up as Cisco, Arista and Juniper face off versus a wave of software startups that include Aviatrix, Alkira and Nefeli Networks.
In addition, the big cloud computing providers could move into on-premise network management. Amazon recently rolled out AWS Cloud WAN as a managed service connecting its public cloud with data centers and branch offices.
Cloud Computing Demand For Edge Gear
Another cloud computing trend to watch involves growing demand for edge network routers and switches. In edge computing, applications and data infrastructure once housed in data centers relocate to local venues such as hospitals, factories or retail stores.
“Clouds are getting disaggregated,” said Juniper’s Jewell at the MKM Partners financial conference. “It means more connection points. It’s good news for networking companies,” he added.
Cisco and IBM have formed a marketing partnership to pursue edge computing deployments. But it’ll take years for the edge computing market to develop and help Cisco stock, analysts say.
The so-called metaverse — virtual worlds enabled by digital technologies via cloud computing — is in its infancy. Technologists describe the metaverse as a shared, 3D environment incorporating virtual reality or augmented reality.
Immersive online gaming experiences and social media apps are expected to be the most popular metaverses initially. Other metaverses could focus on workplace collaboration, e-commerce such as digital fashion, education or real estate.
Metaverses will require accelerated computing. And hyperscale internet data centers will likely be the physical home of metaverse plumbing. Consumers and business users will connect to metaverses via fixed broadband or 5G and eventually 6G wireless networks.
Tech stock heavyweight Facebook (META), which has rebranded itself as Meta Platforms, aims to be a metaverse leader. Facebook and Microsoft have been the two biggest customers of Arista Networks, together representing about 30% of its total revenue in 2020, down from 40% in 2019.
Will Metaverse Boost Network Gear Makers?
Arista stock popped on Nov. 1 when its 2022 revenue guidance came in well above expectations. A big jump in Facebook’s capital spending on internet data centers is one reason for Arista’s rosy outlook, analysts say. Arista, though, hasn’t commented on Facebook’s plans.
Analysts who cover Arista stock forecast 29% revenue growth to $3.75 billion for the company in the year ending Dec. 31, 2022. Juniper stock analysts see revenue growth at 5% over the same period, to $4.95 billion. That’s an improvement from flat year-over-year growth in 2020. Juniper stock slumped almost 9% in the 2020 calendar year.
Cisco stock analysts see revenue growing nearly 6% to $52.72 billion for the fiscal year ending July 31. Extreme Networks’ revenue for the year ending June 30, 2022 is expected to be 11%, to $1.21 billion.
Amid supply chain shortages, both Arista and Cisco have pushed through price hikes aimed at boosting revenue.
The biggest growth driver for Arista stock has been network switches that accelerate communications among racks of computer servers packed into data centers. Besides Microsoft and Facebook, Amazon has been a customer. In a possible boost for Arista, analysts say Google Cloud is now planning to switch some procurement of white-box networking gear to a brand-name supplier.
Cisco is still the biggest supplier of computer networking gear. It had 40% of the network switch market as of June 2021, down from 49% at the start of 2019, according to a Barclays report. Owing to its hyperscale customer base, Arista has gained market share.
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Battle Over Data Center Upgrades
As cloud computing evolves, a new battle looms as hyperscale data centers upgrade to 400-gigabit networks from 100G technology. Tech stocks Cisco, Juniper and Nokia aim to challenge Arista with higher-speed products. Cisco is counting on its new semiconductor products, while Juniper has developed its own Triton chip.
“We continue to envision the 400G cycle as Arista’s largest challenge to its incumbency,” said Raymond James analyst Simon Leopold in a report.
Microsoft is expected to lead in data center upgrades to 400G in 2022, analysts say. Meta Platforms may follow in 2023.
Hyperscale data centers are designed to ratchet up computing horsepower when demand surges. The move to 400G basically creates more bandwidth — essentially fatter pipes that support mobile app downloads and e-commerce.
While Arista’s primary customers have been tech and internet companies, it’s gaining traction in the corporate market. The company has projected 100% sales growth to $400 million in 2022 for “campus” network switching gear sold to large companies.
However, Cisco is the biggest provider by far of networking gear to enterprise customers — large companies, government agencies and educational institutions. During the coronavirus pandemic, corporate spending on data networks slowed amid increased office vacancy rates and the shift to remote work. But profit margins are generally higher for enterprise gear than for internet data centers.
Cloud Computing And Artificial Intelligence Acquisitions
Two of Arista’s acquisitions — Mojo Networks in 2018 and Awake Security — targeted the enterprise market. Mojo Networks makes gear for wireless local area networks. Many big companies are upgrading WLANs to next-generation Wi-Fi 6 technology.
Awake Security uses artificial intelligence software to monitor computer networks for hacker activity.
Among other tech stocks, Juniper stock has also gained traction in the enterprise market with the acquisitions of Mist Systems for $405 million in 2019, and 128 Technology for $450 million last year.
Mist’s wireless LAN platform uses artificial intelligence tools for automation and management features. Juniper aims to integrate Mist’s AI tools throughout its enterprise product line, analysts say. 128 Technology uses AI tools as part of its Session Smart Networking platform.
With the 128 Technology purchase, Juniper targeted a new technology that links corporate headquarters with branch offices and remote workers. It’s called software-defined wide area networks, or SD-WAN.
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SD-WAN Market Emerges
Tech stocks Cisco and VMware were early players in the SD-WAN market. Fortinet (FTNT) is a newer player. Extreme Networks acquired SD-WAN vendor Ipanema for $73 million in September from Infovista.
SD-WAN technology centrally manages and speeds up cloud computing applications. With software-defined networks, companies have less need for costly private data networks leased from telecom companies.
“This quarter, we doubled down on our Infinite Enterprise vision with the acquisition of Ipanema,” said Extreme CEO Edward Meyercord on the company’s fiscal first-quarter earnings call. “We now have important new capabilities such as session-based application performance management, policy enforcement, firewall as a service, WAN edge routing, all delivered from the cloud. Our new WAN edge capabilities will be delivered as a service, and become an important driver of our software subscription recurring revenue.”
Arista stock is in a buy range above a 134.24 buy point. Its buy zone extends to 140.95. Radware (RDWR) is in a buy range, above a 37.01 entry in a double-bottom base. Radware sells cybersecurity and application delivery products deployed in data centers.
Extreme Networks has climbed almost 16% since clearing a 12.39 buy point in mid-November. Juniper stock has continued to climb after an October breakout.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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