Analysts: Little Upside For Aruba Networks

Aruba Networks, Inc. (NASDAQ: ARUN) has limited upside after a buyout rumor and second-quarter earnings beat pushed its shares up more than 30 percent, a couple of analysts said Friday.

Shares of the Wi-Fi equipment company soared Wednesday on a Bloomberg report that Hewlett-Packard Company (NYSE: HPQ) was interested in making an offer for Aruba, which now has a market capitalization of about $2.5 billion.

Aruba got a further bump after beating the Wall Street consensus by 11 percent, and changed hands recently at $24.37, up 7.7 percent.

Following the buyout rumor, "the shares are fairly valued," said Morgan Stanley's James E. Faucette, who maintained an Equal-Weight rating and $22 target.

JMP's Erik Suppiger maintained a Market Perform rating Friday and called the rumored acquisition "a distinct possibility," although the company hasn't commented on a potential buyout.

Suppiger, who didn't offer an Aruba price target, said Hewlett-Packard might pay between $23 and $27 a share for Aruba.

Analysts have said that Hewlett-Packard, if it acquired Aruba, would obtain a 20 percent market share in Wi-Fi equipment, versus 50 percent held by Cisco Systems, Inc. (NASDAQ: CSCO).

"For now, all the focus is on whether the Hewlett-Packard deal gets done," Faucette said.

The company posted higher-than-expected second-quarter earnings Thursday but warned that its K-12 education market may see a slow-down until summer, when federal subsidies start to flow.

Faucette is factoring in pent-up education demand for the second half of 2015, but said a "sticking-point for investors" is Aruba's high rate of stock-based compensation for its executives.

The rate fell in the second quarter to 11 percent of revenue, from 16 percent a year ago.

The market may become more positive on Aruba "as the company continues to trip its stock awards, and its buybacks become more meaningful," Faucette said.