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ANALYST WATCH: Brocade basks in pundit praise

    Investors digging through the rubble left from the past month's sell-off in Internet stocks should take note of Brocade Communications, a company that's posted explosive growth in recent quarters as the de facto provider of switches for fibre channel storage networks.

    With the likes of Cisco Systems (Nasdaq: CSCO), Sun Microsystems (Nasdaq: SUNW) and Oracle (Nasdaq: ORCL) treading water, Brocade appears to be a solid backdoor play on the Internet for the foreseeable future.

    This week, Brocade (Nasdaq: BRCD) easily eclipsed analysts' estimates in its second quarter, raking in $13.3 million, or 11 cents a share, on sales of $62.1 million.

    Analysts were quick to raise estimates, upgrade the stock or espouse the virtues of this relatively new but increasingly important stock.

    Brocade is benefiting from the explosive surge in digital data accompanied by the rapid growth of the Internet. Its customers include Compaq Computer (NYSE: CPQ), Dell Computer (Nasdaq: DELL) and EMC (NYSE: EMC).

    While beating the consensus estimate by 3 cents a share and posting a 42 percent sequential jump in sales, the company said it signed up six new so-called original equipment manufacturers that will add to sales in future quarters.

    Since its initial public offering in May, Brocade shares have twice split 2-for-1 while sailing up to a 52-week high of 185 in March.

    Equally impressive, Brocade's gross profit margins jumped to 58 percent in the quarter, up from 53 percent in the previous quarter.

    "We are pleased to deliver to the fourth consecutive period of quarter-over-quarter revenue and earnings growth, and that's a pattern we hope to adhere to," said CEO Gregory Reyes in a prepared release. "We're not burning cash; we're generating cash."

    Ashok Kumar, an analyst at USB Piper Jaffray, maintains a "buy" recommendation on the stock but warns that investors shouldn't get too emotional about the stock at this point.

    "What this really means is the market is moving from single server, single storage installations to include multiple servers and storage subsystems on a storage network together," Kumar said in a research note. "However it is dangerous to extrapolate the numbers we have seen so far to say that it will be a large market. It just seems to have all the markings of an early adopter market."

    Other analysts point to the stellar sequential improvements in both sales and profit margins as a sign that Brocade has yet to hit its peak.

    Laura Conigliaro, an analyst at Goldman Sachs, predicts sales growth of 259 percent and 72 percent for fiscal 2000 and 2001, respectively, with expanding opportunities and an extremely healthy storage area network market probably driving growth higher.

    "We see Brocade as an emerging leader in the exploding storage networking space," Conigliaro said in a research note. "We believe investors should be well-exposed to various segments including companies in storage systems, storage software, the newly emerging storage utility segment and storage networking."

    Robertson Stephens analyst Paul Johnson raised his fiscal 2000 earnings estimate to 46 cents a share from 34 cents a share and upped his fiscal 2001 estimate to 70 cents a share from 44 cents a share.

    "We believe the strength in the quarter was due to continued strong growth in sales of fibre channel based storage equipment and the building momentum of the company's systems integrator business," he said in a research note. "In the first calendar quarter, Brocade continued to take market share with 68 percent of the fibre channel systems business, and 38 percent of the overall fibre channel market."

    Despite the rosy outlook, Brocade shares are trading at a price-to-earnings ration of around 1,161 with a market capitalization of more than $13.2 billion.

    "Even with the recent multiple contraction, Brocade PEG multiple (4x) is at the high end of the range of leading enterprise vendors," Kumar said. "The upward bias in short-term estimates will be more than offset by the continued multiple contraction due to increased competition in FC and IP SAN solutions."

    First Call consensus expects the San Jose, Calif. company to earn 12 cents a share in its third quarter and 41 cents a share in the fiscal year.

    Twelve of the 13 analysts following the stock rate it either a "buy" or "strong buy."