JNIC...the fool's dd
JNI Goes From Hot to Hotter in Days
Following IPO
By Richard McCaffery (TMF Gibson)
November 1, 1999
Two years ago, the dotcom companies stunned Wall Street with overnight
valuations in the billions. Earlier this year, it was the e-commerce players. Now it's
companies like JNI Corp. (Nasdaq: JNIC), builders of hardware and software
that speed up transactions on the World Wide Web.
JNI went public October 26 with the sale of 4.9 million shares at $19 each. It
closed the first day at $42, good for a 121% climb and a market cap of $1.6
billion. That was last week. Now, it's rising faster than this story is being written,
from $58 13/16 to $73 5/8.
The fuel that's firing JNI, of course, is the Internet. As businesses go online, they
need help from providers of Internet hardware and software to make the leap.
Companies like Cisco Systems (Nasdaq: CSCO), Juniper Networks (Nasdaq:
JNPR), and Foundry Networks (Nasdaq: FDRY) pave the road with routers,
switches, and networking devices.
By now, it's well-known that one way to capitalize on a business trend is to bet on
the companies that provide the infrastructure rather than those offering the
services. That's the way to think of JNI.
Founded in 1993 as a division of Jaycor Inc., the company makes fibre channel
hardware and software products that connect servers and data storage devices.
It's all about speed on the Internet, and fibre channel equipment offers (in many
cases) the fastest, most flexible way for companies to manage access to stored
data.
Since it's so fast, fibre channel is expected to replace Small System Computer
Interface (SSCI) as the transmission interface between servers and clustered
storage devices, according to JNI.
The company's list of influential customers helps make the case: Amazon.com
(Nasdaq: AMZN), Boeing (NYSE: BA), Charles Schwab (NYSE: SCH), and
FDX Corp. (NYSE: FDX). The list goes on and on.
There's no shortage of forecasts predicting growth. Research firm International
Data Corp. expects the market for products based on fibre channel technology
will hit $15 billion by 2002, up from $2 billion in 1998.
Still, infrastructure companies struggle just like services companies when the
products they make turn into commodities, become obsolete, or the market
becomes saturated. Investors considering this industry should be genuinely
interested in fibre channel, storage area networks, etc., in order to do the work
required to understand the technology and JNI's place in the growing industry.
Pricing is clearly an issue in this industry. In its prospectus, JNI's management
says, "The average selling prices of our new and existing products are likely to
continue to decline in the future as we and our competitors introduce new and
more technologically advanced products and as price-based competition
intensifies."
That's the law of the jungle, but in an industry where pricing pressures are this
extreme, investors are wise to align themselves with the sharpest management, one
that's proven -- over time -- it can be the low-cost provider. On this score, it
would make sense to give JNI some time to prove its mettle.
The company has strong momentum. Sales grew to $15.1 million in the first half of
1999 compared to $3.8 million last year. In addition, it turned a profit of $1.8
million, or $0.06 per diluted share, for the same period, and has no long-term
debt.
On the other hand, JNI was cash flow negative for the first half of the year, mainly
because of a run-up in accounts receivable and inventory. That's not unusual for a
young company ramping up growth, but Fools like to see companies maintain
positive cash flow since it's such a crucial measure of profitability. The company
was cash flow positive in 1998, and investors should watch to see that it repeats
the performance in 1999.
Of course, JNI isn't cheap. It shouldn't be if it's worth its salt. JNI trades at more
than 30 times sales and at a P/E that tops 400. At these kinds of prices, investors
should be sure they're getting a company bound to be a player in a major market,
not a supplier in a niche industry.
Based on industry growth predictions, the market looks strong. The fibre channel
industry is fragmented with players like Hewlett-Packard (NYSE: HWP),
Interphase (Nasdaq: INPH), and QLogic (Nasdaq: QLGC) fighting to establish
position.
With its momentum and fresh pile of cash, the company looks like it's in a good
position to grab market share. But if it's a good company now, it will be a good
company a year from now. In addition, investors will have had a year to examine
the company as a publicly traded firm. It's one to watch closely. |
