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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: LindyBill who wrote (36765)	12/18/2000 6:42:18 PM
From: Mike Buckley	Read Replies (2) \| Respond to of 54805

Lindy, I like brocade, own it, ... It will never be a Gorilla or King. As much as you understand GGaming, I've gotta ask why you would ever want to own stock of a company that will never become a Gorilla or King. --Mike Buckley

To: LindyBill who wrote (36765)	12/19/2000 4:11:20 AM
From: Bruce Brown	Read Replies (1) \| Respond to of 54805

I like brocade, own it, and wonder what the hell happened to it today! It will never be a Gorilla or King. A prince of the storage sector? Groups of stocks tend to move in sympathy. All forms of networking - be it fibre channel, optical, IP core routing, edge routing, switching, etc.. - took it on the chin. Not only today, but have been under pressure for quite some time now as valuations and multiples contract to reflect the economic environment. So what happened to Brocade today also happened to Cisco, Extreme, Foundry, Sycamore, Redback, McData, Onis, Nortel, and all the chips that go into that equipment etc... as Terayon Communications tumbled 61% on a warning of a steep loss and lower revenues. The stock is 96% off of its 52 week high of $142. No need to mention the rich multiples all of those companies are trading at today and what such a warning can do. Multiples are right up there with Coke (which has come off about $8 to $10 since I started complaining about their PEG). Cisco has taken a 48% haircut from its 52 week high. Brocade took about a 46% haircut from its 52 week high a couple of weeks ago. Juniper took a 55% haircut. Sun took a 56% haircut. Network Appliance took about a 68% trim. Nortel took a 64% haircut. And on and on down the list. We've seen a contraction in multiples in this correction from the lofty levels. Brocade was trading at $140 to $150 in after hours following their latest excellent earnings report before running back up over $200 in the past couple of weeks. No need to go into all of the fundamental metrics once again, but y/y and sequential growth was 339% and 43% respectively. Q4 profit was $27.2 Million which was up from $3.6 Million y/y. Margins improved across the board. In terms of the overall fibre channel switching market segment, Brocade has increased their market share to 60% from 30% just a year ago. Not a bad increase for one year. Margins improved through that increase as well. The company forecasts revenue growth of 150% (2.5X) for full fiscal year 2001 over 2000 while margins will remain at 60%. R&D spending has increased and Brocade has announced over the past year quite a few other niches that they are delving into for the future. In addition, they have announced the next generation products for their Silkwork line. In the fiscal 2001 forecast the CEO made it clear that it was their goal to forecast the guidance using a conservative figure and then to exceed their guidance. At least it has worked for the past 9 quarters, we'll see what happens in a slowing economic picture. One would like to think that management's conservative guidance took this into account. It will be interesting to see how companies in the data storage and transfer segments fare this coming year with the slower growth. We've all seen EMC, Brocade, Veritas, Network Appliance, Emulex, QLogic, Sun Microsystems, etc... experience valuation corrections based on the economic climate and the extended valuations of each. We can certainly make the case that the software involved in this game is not as intensive as the software involved in the IP core routing game for example. Yet, as gorilla and royalty investors, we need to realize the importance of the data strorage and data transfer segments. Especially companies that dominate their respective niches like EMC, Network Appliance, Brocade Communications and Veritas. No need to mention that one of the key basic first steps is to study the value chain and moats around the key players in each niche. I wouldn't be writing off Brocade as a 'prince in the storage sector'. I would be focusing on how the end user market is flocking to the Brocade fabric solution as market share increases, margins improve and other players in the space fail to execute. In addition, as they broaden into other areas of IP with their solutions it will be interesting to see what kind of S curve growth they might be able to come in contact with going forward. BB (Disclaimer: I have owned shares of Brocade since the summer of 1999)