2HRS2GO: Emulex was due to slide

COMMENTARY--That Emulex succumbed to the fears gripping technology investors should not be a surprise. The truly amazing thing is that it took this long.

Emulex (Nasdaq: EMLX) gave up almost half its value today on worries that customers are delaying purchases. The maker of products for connecting to storage networks could post no quarter-to-quarter revenue growth in the third quarter if the trend continues.

Compared to the rest of the tech industry, storage networking stocks have held up reasonably well over the past several months. Emulex has done especially well, trading just below its all-time high as recently as three weeks ago.

The stock hit that near-peak after Emulex reported a strong December quarter. Emulex investors took heart after the company raised targets for the first three months of calendar 2001.

Company executives on Friday said they still could hit those optimistic goals, though, not if clients keep pushing orders into later quarters. Under the worst-case scenario, which shareholders are certainly expecting, Emulex's revenue won't grow at all from the second quarter.

Because Emulex is the market leader in its niche, Wall Street took Emulex's report as an excuse to abandon every stock related to the field. The list of hammered issues includes Emulex rival QLogic (Nasdaq: QLGC), switch-maker Brocade Communications (Nasdaq: BRCD), and Emulex client EMC (NYSE: EMC), the largest seller of the systems that make up storage networks.

Analyst reactions were mixed. CS First Boston's Amit Chopra saw no reason to change his opinions. U.S. Bancorp Piper Jaffray's Ashok Kumar took Emulex's warning as further evidence for his long-standing thesis that IP-based storage networking is displacing the fibre channel technologies that currently fuel business for Emulex and Brocade. Robertson Stephens analyst Ara Mizrakjian believes Emulex is suffering from an inventory glut partly caused by the decline of dot-coms and exacerbated by strong December sales that resulted in lower demand during the current quarter.

None of the analysts fretted about long-term demand for storage networking products. Corporations have too much data to stash.

Given that long-term view, you might wonder why these stocks are being hit so hard. Obviously they were going to take some kind of hit, but a 48 percent decline for EMLX? An 18 percent drop for BRCD? Down 27 percent for QLGC? Does that make sense?

Sure does.

The storage networking industry has remained expensive throughout the decline of the overall technology market. Heading into this week, Emulex was valued at 80 times estimated earnings for the next 12 months. Brocade traded at 120 times expected profits. EMC and QLogic were the cheapest of the bunch, with forward multiples in the low 50s.

Emulex became particularly ripe for picking over the last couple of months.

EMLX wasn't benefiting merely from seemingly strong fundamentals. It separated itself from peers when the company carried a 2-for-1 split on Dec. 18; since then, EMLX has stayed in positive territory gains while other storage network stocks lost ground.

Funds and traders were having fun with Emulex. Last year's EMLX hoax probably helped by drawing more attention to an already-popular stock, thus making it even more liquid.

More than a few short sellers jumped in as the stock ascended during the fall and early winter. By early January, 8 percent of the float was being shorted. That's not as much as you'll find with popular dot-coms such as Yahoo (Nasdaq: YHOO) or Amazon.com (Nasdaq: AMZN), but a lot more shorting than you'll typically find with solid tech names.

All of that attention was bound to catch up with Emulex. One stumble is all it takes to bury stocks in such a lofty position. 22GO>