Brocade stumbles on downgrade

2 min read

Brocade Communications shares fell 14 percent after an analyst said Monday that the company's prospects have worsened since its last profit warning.

Shares in the Internet infrastructure company were down $4.35, or 14 percent to $25.59 Monday. The stock fell 10 percent Friday on speculation that its relationship with EMC (NYSE: EMC) was strained. Brocade manufactures Fibre Channel switches and management software for storage area networks (SANs).

Morgan Stanley Dean Witter analyst Christopher Stix downgraded Brocade (Nasdaq: BRCD) to "neutral" from "outperform" and lowered his projections for earnings and revenue for 2001 and 2002.

Stix said channel checks with Brocade's smaller customers show business remains weak for its new SAN initiatives; and things have gotten even worse since the company's February warning, when Stix downgraded the stock to "outperform" from "strong buy."

"Any economic recovery will come later than previously expected," said Stix, who declined to peg Brocade to a specific stock price. He said the stock price should be around $10 to $41.

Brocade had been singled out as one of the more promising stock picks in these tough economic times, until its most recent earnings report in February.

When Brocade warned that its second quarter would disappoint, it soured analysts' outlook on storage stocks, leading to a round of downgrades.

Morgan Stanley's downgrade of Brocade was just the latest dose of bad news. Other analysts raised concern that Brocade's relationship with storage giant EMC (NYSE: EMC) may be changing.

Speculation that EMC would embed McData's (Nasdaq: MCDT) switch technology on its networking equipment chips hit Brocade shares Friday. McData's stock soared 25 percent on those rumors.

Analysts downplayed the worries.

"Despite rumblings...Brocade and EMC still have a strong working relationship," said Goldman Sachs analyst Laura Conigliaro in a research note.

"We do not believe Friday's rumblings suggesting that Brocade's relationship with EMC has been damaged and that McData will be the exclusive recipient of some key future EMC business involving embedded switches," Conigliaro wrote.

Salomon Smith Barney analysts H. Clinton Vaughan also said in a research note that Friday's speculation was off the mark. "We believe the more likely scenario would be that EMC would choose multiple vendors' technologies," he said.