Brocade Communications: Superstar Status Prevails -
Brocade Communications: Superstar Status Prevails
- Stocks like Brocade Communications Systems (Nasdaq:BRCD - news) can really give fund managers gray hair. They know they want to own a winner like this because it absolutely dominates a major new technology field -- fibre channel switches for storage area networks. They'd like to buy the stock on a dip, but so far it has rarely pulled back significantly to give them a chance. At $162 currently, it is 12% off the high but still up $46 from when we profiled it in October. Here's the story behind this superstar of a stock.
A popular theme with investors these days is capitalizing on the exploding demand for data storage. This is driven, first and foremost, by the sheer amount of data being generated and transferred across networks. And it's not just Internet traffic behind this. The thousands of companies that have installed Enterprise Resource Planning (ERP) systems over the past several years are producing massive amounts of data that need to be stored, protected, and easily retrieved. Efficient data management is even more critical to e-commerce companies who need to be able to access data immediately and reliably.
Another broad trend pointing to accelerating growth is the advent of broadband Internet connectivity, which will not only drive demand for data storage but also spur the proliferation of data-intensive content like video and audio on the Internet.
Storage area networks, or SANs, bring the benefits of traditional networking architecture to the issue of data storage. Brocade's fibre channel switches and software provide high-speed connectivity (an intelligent backbone, they like to say) across these networks. The market for fibre channel switches is relatively new but growing explosively, with IDC predicting growth from $87 million in 1998 to $1.7 billion by 2002.
Brocade dominates the market for these switches with an estimated 80% share. Its early technology lead helped it secure wins with the majority of OEMs, that is, original equipment manufacturers of the storage systems and network servers.
Brocade just came public in May but is already profitable and expected to grow earnings around 50% a year for the next several years. The stock has soared from an IPO price of $9.50 (adjusted for a 2-for-1 split) to $162 currently.
In terms of grabbing investor attention, Brocade no doubt benefited from the tremendous success of other storage technology leaders like EMC Corp. (NYSE:EMC - news) and Veritas Software (Nasdaq:VRTS - news) . As EMC and Veritas soared, investors looked for other companies that were poised to capitalize on various niches of the data storage solutions market.
Investors should realize that one of the factors contributing to Brocade's astonishing stock performance is limited float. It's a simple case of very limited supply and very strong demand helping to drive up the stock price. Only 6.6 million shares are available for trading out of a total of 53.4 million.
There are naturally many critics who say this stock is ridiculously overvalued, even considering the exciting potential for Storage Area Networks and Brocade's commanding lead in the fibre channel market niche (if you can call $1.7 billion a niche). With a market cap of nearly $8.5 billion and sales of just $69 million in 1999, this company has a long way to "grow into its valuation." But whose to say it's not the next Cisco Systems. This stock probably appeals more to risk-tolerant investors that focus on price and earnings momentum than conservative or value-oriented investors...And, of course, those fund managers trying to keep up with benchmarks like the NASDAQ.
- James Hale
The Online Investor
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