SW - I've got two new ones - VIXL (41.75) and JNIC (70.25), quite a bit larger than my last two recommendations - ANYI(1 to 3 - 200%) and DNCC (1.25 to 4.5 - 260%)- but very solid potential over the short and mid-term.
Most of the SAN stocks have gone up 1000-2000% this year, JNIC and VIXL are only up ~100-200% since October IPOs. IMO they've got the best potential for breaking out with the next SAN rally, small floats for each. May take a month or two, but 100-200% gains are possible. I bought 'em both so I'd have something to hold until next year (too many capital gains this year already), my targets are ~$60 for VIXL, and $110 for JNIC.
This Redherring piece has some good background info:
redherring.com
Storage network fans fuel frenzy -Redherring
By Sarah Lai Stirland
Redherring.com
December 7, 1999
Storage has never sounded sexy enough to make you a million bucks, but many
investors have bet that the storage industry will continue to produce some solid gains.
The action in the storage area network (SAN) sector is typical of the momentum stock
trends of 1999. The market started heating up earlier in the year, tied to market
research projecting stratospheric growth connected with the Internet, and a handful of
the companies carried out successful IPOs. Since the IPOs, the sector continues to be
the flavor du jour, supported by glowing research reports from analysts involved with
underwriting many of the IPOs.
Current favorites include Fibre Channel switch makers Brocade
Communications (Nasdaq: BRCD), Ancor Communications (Nasdaq: ANCR),
Gadzoox Networks (Nasdaq: ZOOX), and Vixel (Nasdaq: VIXL).
Brocade blew out earnings and rose 20 percent this August.
September brought Vixel's turn to shoot the moon.
Network Appliance taps into the data boom.
Looking at the percentage increases of these stocks for the year gives you an idea of
how hot these issues have become. Brocade, for example, is up 1,413 percent from
its May 25 IPO price of $19. Ancor is up 1,249 percent since the beginning of the
year, Gadzoox is up 280 percent from its July 20 IPO price of $21, and Vixel is up 94
percent from its October 1 offering price of $18.
FOLLOW THE UNDERWRITER
"The Internet is all about content, but you can't have content without storage,"
notes Robert Gray, research director for storage systems at technology
research firm IDC. IDC is perhaps the most objective of the research sources
because it is not an investment bank and therefore not involved in the underwriting of
IPOs. Mr. Gray calls the older generation networking firms "massively out of
step" with the market in terms of supplying storage solutions, hence the
success of new generation of SAN companies.
Mr. Gray, whose research has contributed to driving these stocks to new
heights, still sees a lot of the upside. He gives two reasons: e-commerce
companies such as eBay (Nasdaq: EBAY) are businesses that are information
intensive. And the general shift in computing to information devices that
communicate with central servers to retrieve information will also drive demand
for SANs, he says.
"The interesting thing about storage area networks is their role in the post-PC era
-- things people don't talk about is how does content get on (storage devices). It
will all be on the storage area networks," he predicts.
IDC projects that end-users will pay $1.6 billion in 2003 for Fibre Channel
switches, up from $83 million in 1998. Brocade has been widely perceived as the
market leader, mostly stemming from an IDC report at the beginning of the
year estimating that the company had an 80 percent share of the market. Mr.
Gray expects that number to be lower when he issues an update to the report in
the new year.
A glance at the way these companies' stocks have performed this year shows they aren't
exactly a secret anymore. As of Friday, Brocade Communications was trading around
$141.13 after the stock split 2-for-1 on Thursday, giving it a market capitalization of
$7.6 billion. Prior to the split, the shares were trading around $320. The company went
public this May and was priced at $19. Brocade's chief competitor, Ancor
Communications was trading last Friday around $60, up from its plateau of around $9 in
the first half of this year. The company has a market cap of $1.7 billion. Meanwhile,
Vixel was trading on Friday at $37.88, which gives it a market cap of $802 million, and
shares of Gadzoox Networks were trading at $79.94, giving it a market cap of $2
billion.
HEADY AND HEFTY
Such heady growth must give some investors cause for concern. These stocks have lofty
valuations in addition to their hefty market caps. For example, Brocade, at a recent
pre-split price of $320, was trading at a multiple of 48 times projected annual 2000
earnings, according to Needham & Company.
The sector has also created a somewhat frenzied following among Wall Street analysts
who are still bullish on the stocks, but such research should be viewed with skepticism.
Most of the research comes from banks with ties to the SANs companies as
underwriters; these same banks form an intimate group that are also openly competing
for future underwriting business in the same market.
"I still think there's an upside to these stocks," says Shaw Wu, a vice president
and research analyst for broadband and storage communications at Bear Stearns
(NYSE: BSC), which participated as an underwriter on the Vixel IPO. In fact, Mr. Wu
says he's writing bulky research reports on the SANs industry to improve Bear Stearns'
prospects of getting a piece of any more SANs companies that are preparing for the
IPO stage.
Despite SAN stocks' stratospheric rise, Mr. Wu says, "If you believe that the Net's
going to be ubiquitous, what does it mean? It means a lot of these pipes are going to be
built -- I don't think [the valuations] are totally unjustified."
KEEP IT MOVING
Mr. Wu covers Ancor, Vixel, and JNIC (Nasdaq: JNIC), another Fibre Channel switch
maker that went public in October. He maintains Buy ratings on all three, and is about to
initiate coverage on Brocade, as well as Juniper Networks (Nasdaq: JNPR) and
Redback Networks (Nasdaq: RBAK). The company that has the most to live up to
in the Fibre Channel sector is market leader Brocade, which most analysts on
Wall Street rate as a Buy. Needham & Co., which also served as an underwriter
on the Vixel IPO, joined the pack this Tuesday with its own Buy rating for
Brocade. Analyst Glenn Hanus projects that the company's annual revenues will
increase to $156 million next year, up from $68.7 million this year.
Morgan Stanley Dean Witter (NYSE: MWD) is even more bullish, lifting its
revenue estimates Thursday for the firm in 2000 to $170 million, up from its
previous estimate of $147 million. Again, such projections should be taken
lightly, as Morgan Stanley was the lead underwriter of the Brocade IPO.
Bear's Mr. Wu isn't shy about the situation: "You have to deal with reality, which is
momentum."
And as McKinsey consultants Cris Eugster, Jeff Hawn, Kristin Johnsen, and Alberto
Torres write in a recent in-depth article about the storage market, the SAN market is
still in its infancy and technical standards still have to be established.
Summing up the situation, they write: "Data storage has come a long way since the time
when it was hidden in the dark corners of the IT world. The good news is that the prize
for winning the enterprise storage game will be large. The bad news is that everyone
knows this."
redherring.com |
