Business Week Online on SANs: Brocade extracting mileage from it's "independant" switch test (that's what they paid for), and the Writer knows the SANds of time shift relentlessly - -
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STREET WISE By Amey Stone 10/28/99
In Tech Stocks, the Magic Word Is "Storage"
The need for SANs, "storage-area networks" that access corporate data in a flash, has created new stars. But it could be a quickly shifting field
At the dawn of the Internet Age, investors went crazy over any stock with a dot-com in its name. More recently, they've been clamoring for any company whose name contains the word "networks." Think of Foundry Networks (FDRY), which climbed 528% on its opening day, or Sycamore Networks (SCMR), which reached a market value of $14.4 billion on its first day of trading (See Street Wise, "Networking Startups: Racers That Can Never Rest," Oct. 14, 1999). These days, if you can get the three letters SAN into an IPO's prospectus, "you pretty much get the same effect," says Tom Taulli, senior analyst at Internet.com.
SAN stands for storage-area networks, a new kind of superfast network that links a company's main network with its storage systems. One of the clearest byproducts of the Internet revolution is an explosion in the amount of data that's available to be moved around. As a result, corporate demand for storage is said to be increasing at a rate of 100% to 300% a year, depending on the kind of company and the ways they want to use stored information. Companies not only need to store and protect more data but also to be able to use it in ways that can help them compete. By connecting storage systems to networks and adding high-powered software, corporate users can back up systems more easily -- and retrieve the data at high speeds from anywhere at anytime.
"It used to be enough to just go out and buy a lot of storage," says Mark Fernandes, an analyst at Merrill Lynch. Companies just wanted to know their data was protected. "Now, you need 24/7 access to your information," he says. Demand is strongest right now among Internet- and e-commerce-related companies. "The key to having a good site is tracking as much data as you can," says Taulli. "The old way of doing it is not going to work." Although this area seems esoteric, the reason SAN stocks are so hot is because they take advantage of three trends: the growth of the Internet, the need for faster corporate networks, and an explosion in the sort of data that must be accessed quickly.
Some of the hottest initial public offerings of the year have been companies that supply high-tech components that go into SANs. Since going public last May, Brocade Communications Systems (BRCD) has soared from an initial price of $19 to its current $285. Brocade sells high-end switches that link storage systems to networks, and its stock will likely split in early December.
The market's newest darling is JNI (JNIC), another SAN stock, which was priced at $19 a share and closed at $42 on Oct. 27, its first day of trading. James Gribbell, a portfolio manager at David L. Babson, got in at the initial price and was hoping to buy more shares on the open market in the $20s. "Obviously we didn't get a chance," he says. The week before, at the IPO of SAN-related Crossroads Systems (CRDS), that stock quadrupled in its first day of trading.
Investors need to keep in mind that SAN, like other hot tech sectors, is fiercely competitive -- and so new that the landscape is constantly changing. For example, Brocade has thus far dominated the market for high-speed "fibre channel" switches that go into SANs. But that doesn't mean other switch makers couldn't gain market share. "It's very much a horse race in the market at this point," says Robert Gray, research director for storage systems at International Data Corp. For example, while Gray's January, 1999, report on the industry showed that Ancor Communications (ANCR) was far behind Brocade in market share, Ancor seems to be gaining ground lately. Given that Ancor's valuation is far cheaper than Brocade's, Piper Jaffray analyst Ashok Kumar thinks Ancor "has significant upside potential."
"FIBRE-CHANNEL" MARKET. Two other recent IPOs that compete in this same area, Gadzoox Networks (ZOOX), and Vixel (VIXL), also can't be counted out, says Gray. Although they now mostly sell lower-tech products such as "hubs" and "loop switches," they are using relationships with current customers to sell more high-end switches. Gray is coming out at yearend with a new report on the fibre-channel storage market that will include new market-share numbers. Investors will want to take a close look.
"We think we have significant critical mass and resources to continue to dominate our space," says Greg Reyes, Brocade's CEO. He cites an independent test of fibre-channel switches, released on Oct. 26, that rates Brocade's product more highly than Ancor's or Vixel's. Both Ancor and Vixel fell sharply on Oct. 27, while Brocade notched another 10 points.
Fibre-channel switching stocks are just one way to play the SAN market. Another is to buy software makers with products that make the SANs run, says Fernandes. He recommends Veritas Software (VRTS) and Legato Systems (LGTO). The earnings of both companies are growing by 50% a year, and while they may seem expensive on a price-to-earnings basis, they are far cheaper in price-to-revenue terms than the likes of Brocade, Fernandes says.
MOMENTUM GAME. Kevin Landis, manager of the Firsthand Technology Value Fund, owns Legato as a way to play growth in storage. He also owns Adaptec, (ADPT), which makes adapter cards and other software that go into storage (it also owns 7% of JNI). Other companies that make chip-level components include QLogic (QLGC) and Emulex (EMLX). Both will benefit from growth in demand for storage networks, says Kumar.
Finally, of course, there is EMC (EMC), which offers corporations a range of high-end storage products, including the SAN. EMC has been one of the hottest stocks of the past decade, largely because it offered investors one of the only pure plays in storage hardware. With the recent crop of IPOs, there are far more opportunities for investors to focus more narrowly on the SAN market.
Many of these stocks, like the dot-coms and the networkers before them, have already reached prices that seem far beyond what they could ever command based on a reasonable p-e. But storage networking is still a young market that stands to grow exponentially in years to come. For now, investing in SAN stocks is basically a momentum game. If the industry continues to grow faster than expected, the stocks could keep moving up. If growth slows or an individual company slips because of competition, watch out.
Amen brothers and sisters
Douglas |
