Alcatel-Lucent SA (ADR) (ALU): Third Great Router War Leads Industry Transition

The Incumbent Champions

Cisco Systems, Inc. (NASDAQ:CSCO) is ever present in the core routing space. Cisco was the winner in the first router war when it became a market leader. The war was not as heated since the Internet was new. The company is huge with a strong balance sheet that has a ton of cash at $45 billion. That buys a lot of marketing and sales. Cisco is a gigantic company and it has other sources of revenue. The core routing segment is a portion of it. The company has $50 billion in revenue if I were to round up. It is not sounding the emergency siren if it sees lower market share. As far as I can tell the core routers ALU is selling can beat Cisco’s on a 1-to-1 basis. However, ALU’s product is not yet ready for multi-chassis. ALU’s product is designed to give everything in one package with multi-chassis as the next step. The current core routers rely on multi-chassis as the first step.

Juniper Networks, Inc. (NYSE:JNPR) managed to carve a place for itself in the second router wars. Everything I read calls the situation in the core router space a duopoly between Cisco and Juniper. Juniper is the minority in that relationship. Juniper’s revenue is only $4 billion. Core routing is its bread and butter. It was a bummer for the company when ALU jumped into the edge router market. The fact that the company created a nice market share for itself means that its foray into the core space is at least a concern if not a serious threat. Juniper losing market share in its main segment would create problems. Juniper’s margins have been low around 8%, when a few years ago they were pushing 15%. Making less sales would further depress net margins or flip them negative. Cisco has margins above 20%.

ALU has been losing money, but the bar of success for a company like that is much lower. Juniper is not the most beaten up company on the market. It is not an unassailable cash machine that is a straight buy and forget. It is in the murky middle. ALU has far more potential that can be had for far less cost. Cisco is the nice diversified juggernaut with a nice, but not hefty, dividend.

Announcing the Third Router Wars

I am being way too dramatic, but it is way more interesting than being boring. Cisco is likely to be the titan on the passive defense. Juniper will be proactive about maintaining relationships and winning clients. ALU is the upstart hoping to make a name for itself. Craft your own investment ideas. I like Alcatel-Lucent’s balance of risk to reward, and Cisco’s long-term outlook. I still need to take my ALU position, but I will soon enough.

The article Third Great Router War Leads Industry Transition originally appeared on Fool.com and is written by Nihar Patel.

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