Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Computer Network Technology (CMNT) -- Ignore unavailable to you. Want to Upgrade?

To: George Dawson who wrote (636)	8/3/1999 12:50:00 PM
From: Prasanna L Soni	Read Replies (1) \| Respond to of 750

Good Afternoon, It is no fun watcing your stocks go down 50% in one month. At this speed it will be ZERO in the next month. :-) WON'T HAPPEN ! I am long from $20 bought more @14 and today I bought 250 Jan 12.5 calls foe apprx 2 5/8. Please see the attached article by Bill Schaff. It is from last weeks issue of INFORMATION WEEK Please comment Best Wishes Prasanna Taking Stock: Storage Area Network Play Computer Network Technology saw its stock price tumble, but the storage vendor is poised for growth By William Schaff Few investors these days get excited about software and IT services. But I'm old-fashioned--I have memories of major market downturns and the days when people investing in a company actually expected it to turn a profit. As a result, I prefer companies that have compelling valuations and a good business plan. That's why I like Computer Network Technology Corp. (CMNT-Nasdaq), which develops and markets enterprise networking hardware and software products, and offers enterprise consulting services. The company's products make data stored on mainframes available to more people within the enterprise. The company stumbled recently. On July 7, it released preliminary results for the second quarter of 1999 showing diluted earnings per share of 7 cents on revenue of about $38 million. Analysts had estimated the company would earn 10 cents to 11 cents per share. Company officials blamed the shortfall on software deals that were delayed from the second quarter to the third. Impatient investors sold the stock, which fell from a high of 27-3/4 on May 24 to 16 last week. The problem with being so short-sighted is that software sales have always been unpredictable--unless, of course, your name is Microsoft. What makes Computer Network Technology compelling--besides the fact that it's undervalued--is that its future is tied directly to the growth of high-performance storage area networks. Storage and storage management will remain one of the fastest-growing components of IT over the next few years. And storage area network architecture makes all storage devices accessible to all servers on the network, which allows for greater storage efficiency and ease of access. The company's networking products include Channelink, UltraNet, and FileSpeed systems, which let clients tie high-speed storage area networks to their legacy and open systems. For example, UltraNet and Channelink products are integral parts of the mirroring application on EMC storage products. Computer Network Technology recently introduced Enterprise/Access 2000, a server that links legacy enterprise applications to customer-relationship management, electronic commerce, and enterprise resource planning software. The company has also partnered with some leading companies, including Siebel Systems and the Cap Gemini Group, to reduce implementation times, improve the utilization of resources, and lower the cost of ownership. Last week, the company released its final results for the second quarter. Revenue was $37.8 million, up 13% year over year. Earnings, excluding one-time gains, were 7 cents per share, up from 4 cents last year. Product revenue was $26.4 million, up 9% from a year earlier, while service revenue rose 24% to $11.5 million. Storage area network revenue was up 67% to $13.6 million, illustrating the importance of this segment. It now accounts for almost 36% of revenue. The company is still fairly small. With 25.2 million shares outstanding, its equity market capitalization is around $400 million. The biggest risk, as always in investing in a small-cap technology company, is in the execution. Was the recent inability to close deals a short-term issue--or a reflection of bigger problems? I'm willing to bet that the current strong business trends will work in the company's favor. Remember, patience is a virtue. If a single large software order delay can dampen investors' enthusiasm for Computer Network Technology today, imagine what might happen if things go the other way in the future. At the current price, the downside risk is reduced and the upside potential is greatly enhanced. My fair value is $23 based on the company's target of 20% to 25% revenue growth, 60% gross margins, and 15% operating margins. The recent price plunge reminds me a lot of the security companies, Axent and Network Associates, that were recently dumped--only to recover as investors realized they weren't going out of business anytime soon. William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 Stock Index. You can reach him at bschaff@bayisle.com