Citing increased competition in the storage sector and the "inflated" valuation of Brocade's shares, U.S. Bancorp Piper Jaffray analyst Ashok Kumar cut his rating on the stock to "neutral" from "buy."
In early trading, shares of the San Jose, Calif.-based maker of equipment for storage area networks were off $13.75 at $96.50. However, a late rebound trimmed the loss to 94 cents, as Brocade closed at $109.31. The shares have traded between $185 and $4.75 during the past 52 weeks.
In his report, Kumar said a competitor, Nishan, will unveil this week a technology that could pose a threat to Brocade.
Brocade makes software and equipment, such as switches, for fibre-channel storage area networks (SANs), which link devices used to store vast amounts of digital data.
Kumar believes Nishan's technology, which uses already existing Internet Protocol (IP) and Ethernet technologies, will challenge fibre-channel, which is a high-speed way of connecting storage devices together or attaching them to servers.
"Fibre channel is a relatively poor implementation vehicle for storage area networks with so much IP-based networking available," Kumar said in his report.
The analyst added that he believes Intel and IBM are among the tech giants that will likely make investments in Nishan. He said Cisco Systems, Nortel Networks, Lucent Technologies and Sun Microsystems also may invest.
According to Kumar, this "critical mass of backers" will help establish IP and Ethernet as the "technology of choice" for SANs.
Such competition will squeeze Brocade's bottom line and increase the risk around the stock, which Piper Jaffray regards as overvalued.
"With weakening fundamentals and inflated valuations, can investors afford to ignore the writing on the wall?" his report asked.
Other analysts, however, remain optimistic about Brocade's shares.
Last week, the shares were raised to "buy" from "outperform" by Salomon Smith Barney analyst John C. Dean, who set a price target of $190. The shares also were reiterated a "buy" by analyst Philip C Rueppel at Deutsche Banc Alex Brown, with a price target of $185 within six to 12 months.
"We continue to believe that Brocade is one of the best positioned companies in the SAN industry, and that over the short term, fibre-channel networks will be the solution of choice," Rueppel said today.
Brocade chief financial officer Mike Byrd defended his company's technology as "safe, reliable and proven."
As for Nishan's plans, he said that "there's just no product out there. It's more of a concept and at the end of the day there's a lot that needs to be done before a product does come out."