There is a wide range of opinions from the analyst community about 3Com. DLJ, Lehman,and Prudential are pitching gloom and doom, CS First Boston, Montgomery, Bernstein, Goldman, Robby Stephens and JP Morgan are leading the cheers and everyone else seems to be on the sidelines. I've talked to all of these analysts, to 3Com, to Intel, to Cisco, to TechData, et al. and have the following observations:
1. The 15% NIC price cut referred to by DLJ in its estimate revisions is grossly overstated. Actual price decline = 5-7%, normal for this period and anticipated by 3Com in its guidance. In the long run, expect 3Com's NIC prices to hold a little better due to the deal with Microsoft - offloading communications functions to an ASIC on the NIC will really improve corporate desktop performance, definately worth a 10% premium.
2. TechData's preannouncement is entirely due to the PC market. Dell, Gateway and Compaq are cutting them out of the loop with direct distribution of PCs, while Merisel and Pinnacor cut prices to hold share. The Treasurer of TechData told me that networking was not a factor in their announcement.
3. 3Com is not losing share to Cisco in small and medium enterprise market. You need to look at all of the Dell'oro data, not just the summaries provided for free on the web site. In the fixed port and desktop switch categories typically bought by small businesses, 3Com continues to extend its industry leading market share. Cisco is also taking share, but not from 3Com. Cisco's biggest marketshare gains have been in high-end modular departmental switches, where it now has more than 60% of the market. 3Com was not, is not and will not be a big player in that category.
4. Yes this is a seasonally weak quarter. 3Com has been giving guidance of flat to slightly down revenues in this quarter, for months. Guidance has not changed in the slightest. BTW, many companies, including CSCO, refuse to change guidance in the middle of a quarter as a matter of principle. A few reasons why it is unlikely to be a catastrophe: a) PC sales have been surprisingly strong in January - good news for NICs and Modems b) Jan-Feb is traditionally a huge period for remote access sales - all those holiday PCs are trying to get on line, anyone having a little extra trouble? c) Management had to save a little something from last quarter. d) Gross margins are almost certain to be up, given the momentum in inventory improvement evident in the last quarter
Conclusions: most of the negative sentiment is just smoke, and there is no fundamantal change in 3Com's likely performance. 3Com may miss the quarter, but if they do, it will be by a penny or two and will not be indicative of long-term weakness. No, 3Com is not going to drive Cisco into the sea, but it doesn't have to. Modest top-line growth (18-20%) and operating improvements will go a long way to delivering EPS growth well in excess of market averages. Don't forget that Palm (growing 70% YoY) is now 10% of the company and will be broken out separately soon, perhaps this quarter. Your stock is on sale, buy some. |
