Analysis on Juniper v Palo Alto Networks

The following is my position/opinion on the near term outlook for Palo Alto Networks (PANW) due to its exposure at their patent trial based on the facts as I understand them.  None of the following should be construed as investing advice or a recommendation for any investment:

The Juniper (JNPR) v Palo Alto patent infringement case should provide ramification for either company.  It is my opinion the risk/reward is skewed negatively towards Palo Alto heading into the trial scheduled for February 24^th, 2014 in Wilmington, Delaware.  The trial should take about a week or two to complete and a jury verdict should be rendered sometime in early March.

Markman Advisors wrote a very good analysis and update of the pre-trial rulings, which can be found here: 

https://www.hvst.com/shares/1838

I believe last Thursday's 12% jump was premature and investors evaluated the development incorrectly, which often happens with patent related developments.  Juniper now has 7 patents that they will argue PANW infringed at trial.  PANW will be unable to argue invalidity at trial, which is a key defense in patent infringement cases.  Juniper only needs to prove that 1 claim on 1 patent are infringed to prove their case.  The above presents a serious risk to PANW in the short and long term.  Besides damages that could be owed to Juniper, they are also seeking a permanent injunction that would bar PANW from selling almost all of their product line.  Any decision positive or negative from the court / jury will likely spend a long time in appeals either way.  

The case will be a battle of experts from both parties.  JNPR needs their expert to prove to the jury that PANW’s equipment infringes on JNPR’s patents.  PANW needs their expert to prove that their equipment does not use JNPR’s patented method and instead uses a non-infringing method.

The following is PANW’s risk disclosure from their recent 10Q, page 27:

Should Juniper prevail on its claims that one or more of our appliances infringe one or more of its valid patents, we could be required to pay substantial damages for past sales of such appliances, enjoined from manufacturing, using, selling, and importing such appliances if a license or other right to continue selling our appliances is not made available to us, and required to pay substantial ongoing royalties and comply with unfavorable terms if such a license is made available to us. Any of these outcomes could result in a material adverse effect on our business. Even if we were to prevail, this litigation will be costly and time-consuming, divert the attention of our management and key personnel from our business operations, deter distributors from selling our appliances, and dissuade potential end-customers from purchasing our appliances, which would also materially harm our business. During the course of litigation, we anticipate announcements of the results of hearings and motions, and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the market price of our common stock may decline.

We are vigorously defending the lawsuit. At this stage in the litigation, we are unable to predict the likelihood of success of Juniper’s infringement claims.

I believe this will add a significant amount of risk to the investment, which many will fail to understand and add a fear component to the investment.  I expect consistent selling leading up to the trial as investors remove themselves from the associated risk.  I expect further volatility in PANW and possibly in JNPR as court developments eventually flow out of court and are quickly analyzed by the investment community.  I am hopeful that a mainstream news organization will be at the trial live.

Palo Alto is also scheduled to release earnings before the market opens on February 24^th and will hold a conference call at 8:00am EST.

I have no position in any security discussed and no plans to execute any trades in any security discussed.  The above reflects my opinion based on the facts as I understand them.  I was not compensated for this post or recommended a position to anyone.

If there are any factual errors, please report them to iphawk@outlook.com , in order for them to be fixed.