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Author: robrat Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3454  
Subject: Re: Gadzooks !!Network!! Lemmings Date: 9/8/2000 7:53 PM
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Yes, there are many Lemmings running around - and yes JNPR is an amazing company with great management. But to earn back your investment using anything approximating a long term buy and hold strategy you will need to project the great performance way out into the future. I mean way out into the future. Now you could be right that JNPR has the best router especially in light of its software. They are executing fabulously and winning market share right out from under the nose of the most feared Gorilla of them all MISTER CISCO.

Now, no matter how you feel about taking food away from the Gorilla while he's watching you, you also have to look further. JNPR grew earnings at an amazing rate last year (540% y-o-y). To earn its high valuation - what is it now? P/E 1500? Man can you even imagine that? Still, it is growing earnings and gaining market share like no-ones business.

Still, to earn back your investment you need to decide where this narrow business sector is going. Are we always going to need super fast routers?

Think of the analogy of computers. Who in their right mind, 30 years ago, would have thought that mainframes would be displaced by minicomputers which were displaced by microcomputers? Why did this happen? It happened for the very fact that computer demand was absolutely explosive and had a huge price elasticity. At the right price point everyone started to buy them. Killer applications started popping up (games, spreadsheets, wordprocessors, modem software, etc.). The price point was reached because mainsteet did not demand the same performance that was demanded by the much smaller markets of academic institutions and businesses. When PC's became available they entered in an entirely different value chain compared to their larger bretheren computers.

During this time the big computer builders laughed. These smaller computers were meare toys and could never do the job of the bigger computers. But that value chain kept growing and the performance kept improving and the shere number of smaller computers eventually made the bigger computers far less essential.

Routers could well take a similar path. I for one do not doubt that the demand for routers will continue to grow exponentially. This sounds like great news for CSCO and JNPR, but consider also what kind of performance will be demanded from such routers and what other competing technology could place a downward pressure on performance.

Routers are definitely losing their former dominant position at the core of the internet. Fiber optics is taking that position front and center.

When optical switching becomes widely available it will provide a huge surplus of capacity for the core of the internet - in much the same way that transistors became a huge surplus in electronic devices. I am not saying that we won't find a use for this huge surplus. I believe we will. But with the huge capacity and ability to switch it from one metropolitan area to another this resource will be abundant and wasted. Again to use an analogy - no one worries whether we waste a few thousand transistors in a processor chip ... they're plentiful and cheap.

This huge bandwidth capacity at the core will have the effect of pushing the core out and shrinking the edge. Remember that while the edge was large the demand for highly specialized routers that are super fast is crucial. But with the edge shrinking and the edge coming right up to your door step, things will change dramatically. Routers will make their way into your home, business, apartment building, etc. Routers will be part of your PC, your TV set top box, etc. Routers are going to proliferate like you can't imagine. But they won't be the big and fancy routers made by CSCO or JNPR.

BUT WHAT WILL THIS ROUTER LOOK LIKE? That's the question you have to ask. Will it be the humungous processor that is switching signals within the metropolitan area or will it be a small CMOS chip that sits in a box on the side of your house or in your computer?

Back to the original point. Sure, JNPR is doing a great job and they are eating the Gorillas lunch - but that is not enough to consider for this company with its huge valuation. You also need to consider where this whole router market is going.

I challenge this board to consider the larger question of what the future holds for routers. Do we really need the fastest router or will the market turn to smaller buy prolific routers?

I wish you all the very best of luck and patience in their investments.

Rob
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