It's easy for value investors to have a love-hate relationship with a stock like Aruba Networks (Nasdaq:ARUN). The company has been delivering solid revenue growth and the company's WiFi and WLAN products are well regarded in the market. But the stock also trades at robust valuations, carries a significant short interest, and has the pleasure of competing against behemoths like Cisco (Nasdaq:CSCO). While I would caution investors to take note of the risks involved here, new products could yet lead Aruba to have a strong 2013.

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BYOD Still a Driver
One of the reasons I'm interested in Aruba for 2013 is its (relatively) new ClearPass product. This device management platform allows any personal mobile device to securely connect into any enterprise network, and offers additional perks like automated onboarding and superior provisioning and policy management.

"Bring your own device" (BYOD) is an increasingly powerful trend in enterprise IT, as numerous professionals have found smartphones and tablets to be invaluable business tools. Consequently, a product that simplifies the integration of such devices ought to do well.

Nevertheless, I think there's more to the ClearPass angle. For starters, every $1 of ClearPass sales seems to bring another $2.50 to $3 in additional Aruba equipment, software and service revenue. As such, ClearPass could be a foot in the door for Aruba that turns into a crowbar - existing customers of Cisco, Hewlett-Packard (NYSE:HPQ) and Motorola Solutions (NYSE:MSI) may initially turn to Aruba and ClearPass for its BYOD capabilities, but may ultimately convert even more of their WLAN/WiFi spending to the company.

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Growing Share in a Growing Market
Some investors and analysts reacted with concern when Cisco's wireless business outgrew Aruba's in the most recent quarter. I think this concern is largely overblown and that Aruba remains a share-gainer in a growing market.

First, Cisco got a sizable benefit from sales into the lower-margin service provider wireless business (a business Aruba exited in 2011). Secondly, Cisco had an easier comp and has gotten more aggressive about bundling. While a more aggressive Cisco is never a good thing for any networking company, I believe Cisco will struggle to maintain this momentum, particularly if Aruba can continue to out-innovate on the margin (like ClearPass).

Overall, Aruba appears to have about 12 to 14% share in a roughly $3.5 billion to $4 billion market. Cisco dominates with over 50% share, but Aruba's share is more than double that of HP, Motorola and Ruckus Wireless (Nasdaq:RKUS). Over the last few years, Aruba seems to be growing at the expense of HP and Motorola, and various market research groups have projected Aruba's core market to grow at a low-to-mid teens rate over the next three to five years.

Still a Risky Name
While I don't think that the BYOD or WLAN trends are going to dissipate anytime soon, Aruba is hardly a slam-dunk success. For starters, enterprise IT budgets are never set in stone. What's more, bundling from Cisco (and perhaps Juniper (NYSE:JNPR) could become more appealing in an environment of tougher budgets. In addition, there's the risk of competition - Cisco has made wireless a priority and companies such as Ruckus could migrate into more of Aruba's core addressed markets.

Along similar lines, Aruba may need to cast its nets more widely in order to maximize its potential. Aruba backed out of the service provider market largely due to the lower margins, but now many sell-side analysts decry the lost growth opportunities. Likewise, not everyone is sold on the idea that Aruba can migrate from the large enterprise environment (where performance demands are high and buyers are generally more willing and able to pay for performance) to the mid-tier, though the introduction of Aruba Instant (a cloud-based AP control) should help.

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The Bottom Line
If the WLAN market can indeed continue growing at a low-to-mid teens rate, it doesn't seem so unreasonable to project that Aruba could grow its revenue at a mid-teens rate (market growth plus share growth). As the company grows, I likewise believe it could see significant gross and operating margin leverage.

Should Aruba produce long-term free cash flow (FCF) margins in the high teens (which, frankly, is not that high for a quality tech hardware company), that would work out to mid-teens free cash flow growth and a fair value in the mid-$20s. Were the company able to achieve Cisco or F5 (Nasdaq:FFIV) levels of profitability and free cash flow conversion, a target in the high $20s or low $30s wouldn't be out of line.

As a result, while I do believe Aruba is a risky play (and one that is likely to be quite volatile), I also believe that the risk-reward profile here is more than interesting enough to be worth serious consideration.

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