Even if consumer demand for smartphones and tablets has started to disappoint lately, there is little question that it is still a major emergent trend in enterprise IT. As Aruba Networks (Nasdaq:ARUN) is built upon facilitating wireless access to network resources, it is a good pure play on this secular growth. While worries about enterprise IT spending and reinvigorated competition are relevant in the context of a robust valuation, this is still an interesting tech growth story.
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A Solid Start to the Fiscal Year
Aruba is getting its fiscal year off to a solid start. Revenue rose 44% in the quarter and 5% on a sequential basis. Profitability is also fairly good. Gross margin did worsen from last year ((whether generally accepted accounting principles (GAAP) or non-GAAP)), but improved decently on a sequential basis. Operating income was more uniformly positive - the year-on-year GAAP increase being so large as to almost be irrelevant, while the company added almost a point and a half to non-GAAP operating margin on a sequential basis. (To know more about income statement, read: Understanding The Income Statement.)

Staying Ahead of the Curve
One of the worries with Aruba, has been that a renewed vigor from Cisco (Nasdaq:CSCO) in wireless that will wreck the growth story. Well, Cisco is doing better, but not enough so as to take away Aruba's momentum. For the last quarter, Cisco reported wireless growth of 8% on an annual basis, and a sequential decline of about 11% - well below Aruba's results.

Likewise, the most recent reports from Meru (Nasdaq:MERU) and Juniper (NYSE:JNPR) weren't bad, but don't seem to indicate any major threat to Aruba right now. With Hewlett-Packard (NYSE:HPQ) not having yet reported, at the time of this writing, it still looks as though Aruba is staying ahead of most of its major rivals, and growing its share.

A Small Tuck-In
Aruba also announced that it was acquiring privately-held Avenda Systems. Details were sparse, indicating that this is a rather small deal. Still, it will add support for Android phones and tablets on Aruba systems, and that makes sense. (To know more about privately-held companies, read: What's The Difference Between Publicly- And Privately-held Companies?)

Longer Term Threats of IT Spending and Rivals
Is further wireless penetration in the corporate world a given? Probably ... but there are no guarantees on the pace and timing. Employees certainly like using wireless devices like Apple (Nasdaq:AAPL) or Samsung phones and tablets, but the wireless office often reminds me of the paperless office - a nice idea, but something that will take much longer (if ever) to completely come to pass.

There's also the aforementioned worries about competition. Cisco still has about half of the wireless local area network (WLAN) market, and for all of its problems, it is still a threat to Aruba. Likewise, what of Alcatel-Lucent (NYSE:ALU)? There's an existing relationship here that provides a meaningful amount of sales to Aruba, but there's an ongoing threat that Alcatel will weaken further or develop rival products. Don't forget, too, that Chinese competitors like Huawei and ZTE (OTCBB:ZTCOY) are getting more active in this market.

The Bottom Line
The chances are good that either Aruba or Meru (and maybe both) will take a bid from the likes of Hewlett-Packard or Motorola Solutions (NYSE:MSI). If WLAN is real and the growth looks durable, these large companies cannot just cede such a large market share to Cisco.

Absent a deal, Aruba can still work out as an independent company. Right now, they are one of the fastest-growing players in this space, and they have an attractive list of collaborators and partners. It takes aggressive assumptions to make this stock look cheap, but there is seemingly always demand for growth tech stocks and Aruba has the growth and the market exposure to draw interest when investors want to love the sector again.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: ARUN, CSCO, MERU, JNPR, HPQ, MSI, ALU, AAPL, ZTCOY

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