Stocks in Focus Dec 17 1999 9:00AM CST Archives...
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Data Banks of the Post-PC Era*
Brocade: The Cisco of Storage
by Chris Connor
Overview
In the universe of hot SAN stocks, Brocade {BRCD} may be the star that shines the brightest. Brocade provides fibre channel fabric switches and SAN management software products to such customers as IBM {IBM}, Data General of EMC {EMC}, Dell {DELL}, and Compaq {CPQ}. In fact, Brocade dominates the SAN switch market the way that Cisco {CSCO} dominates the LAN switch market. Moreover, the SAN switch market should easily outpace the growth of the LAN switch market over the coming years. SG Cowen predicts that the fibre channel switch market will grow 112 percent per year to almost $2 billion in 2002.
Power of the Switch
Unlike hubs, switches facilitate connectivity between any SAN devices and are able to maintain high bandwidth as additional devices are added to a SAN. Simply put, Brocade's fabric switches provide multiple servers with high bandwidth connections to multiple storage systems. With Brocade's switches, companies can build their SANs as large as they want to without worrying about a loss of performance.
Strong Operations
Brocade appears to be firmly in the driver's seat of the SAN market with 6 consecutive quarters of sequential revenue growth. Over the last two quarters, revenue growth has accelerated dramatically. Brocade has also grown revenues rapidly on a year over year basis. For the quarter ended October 30, revenues soared to $30 million from $5.4 million during the same period a year ago. Brocade has been able to transform this massive growth into profits while Gadzoox {ZOOX} and Vixel {VIXL} remain unprofitable. Looking ahead, analysts estimate that Brocade will grow earnings 42.5 percent per year over the next 5 years. These estimates could prove to be conservative if the SAN market proves to be more than a niche market over the long term.
Risks
Do not think for a second that the likes of Cisco and Lucent will idly let Brocade enjoy the extremely attractive SAN switch market all by itself for an extended period of time. Brocade may look like the Cisco of storage now, but that status may not stand when the real Cisco enters the fray. There is a possibility that Brocade can hold off these technology powerhouses with its early lead and SAN-focused technology, but competition from the likes of Cisco and Lucent should never be taken lightly.
Investment Summary
Brocade looks like the premier stock in the SAN space because of its rapidly accelerating growth and its dominant position in the fibre channel switch market. The importance of the switch market is further demonstrated in that Gadzoox is transforming itself from a managed hub maker (in which field Gadzoox dominates) to a switch maker. While Gadzoox continues with its transition, Brocade should continue to grow its revenues and earnings rapidly. In the short term, investors could still realize significant price appreciation with this stock due to the explosive SAN market and Brocade's position in it. Over the longer term, Brocade's fortunes are completely dependant on the success of the overall SAN industry.
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