Network Storage Can Rebound
By Hal Plotkin
CNBC.com Silicon Valley Correspondent
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Jul 12, 2001 04:31 PM
Earnings warnings and financial analyst downgrades sent network storage stocks sinking along with most of the market over the past few weeks. Few observers are willing to predict exactly where those valuations will settle. But the group staged a nice rally on Thursday as several leading industry analysts suggested that the sector's woes have been exaggerated and that growth will resume soon, albeit at a somewhat slower pace.
"It's pretty clear to most observers that the network storage stocks got out of whack on the valuation side so it is entirely credible that the stocks sold off recently," says Charles Rutstein, research director at Forrester Research, based in Cambridge, Massachusetts.
"But the bottom line is that in the long run the buyers of these technologies save money that helps to make them more economically viable," he says. "On a value-to-customers basis, I think the critics are dead wrong."
Rutstein adds that he does not expect to see the leading network storage firms join the tech sector's permanently disabled list. Instead, he says they should emerge from the current economic slump in a stronger position because of all-but-certain growth in end-user demand.
Earlier this week, U.S. Bancorp Piper Jaffray analyst Ashok Kumar gave the network storage stocks a jolt in a research note in which he suggested there was little or no justification for the current valuations of storage firms Brocade Communications Systems Inc. {BRCD, News, Boards}, Emulex Corporation {EMLX, News, Boards} and Network Appliance Inc. {NTAP, News, Boards} along with storage component maker QLogic Corporation {QLGC, News, Boards}.
"It is now evident that the network storage industry is not opaque to the economic downturn," Kumar wrote. "The hype of the network storage industry exceeds its current capabilities."
The situation is so bad that Kumar says he's begun to wonder whether enough customers will be willing to buy network-storage as a standalone product or service as opposed to expecting it to be bundled with whatever other computer hardware or software they may purchase.
"While there is no question that storage is an essential component of computer systems," he says, "it is not clear how powerful the pull is for network storage as an independent purchase."
What's more, Kumar maintains that the storage sector's two most talked about product categories, Storage Area Networks (SANS) and Networked Attached Storage (NAS), don't deliver better performance or reliability than the pre-existing direct-attached storage technology, called SCSI, that is already in use at most businesses.
Unlike direct-attached storage, network storage allows a company to purchase just the data storage resources that are needed, which can immediately be scaled up and down depending on changes in actual demand. Purchasing direct-attached storage technology for a single department or a single computer server, by contrast, often results in pockets of both under and over-utilized hardware within the same organization.
"With networked storage you can take a storage asset and share it with any servers on the network," says Roger Cox, an analyst at Gartner, based in San Jose, California.
Cox confirms that there has been a fall-off in the demand for network-attached storage recently. But he attributes that to the general malaise in the economy rather than to any sector-specific factors. Over the last six months of last year, for example, the sector's annualized growth rate fell to about 10 to 12 percent, as compared with roughly 25 percent growth over the past few years. Gartner has not yet compiled similar figures for the first six months of this year.
In a similar vein, Rutstein and his colleagues at Forrester Research recently completed a survey of 35 global firms with significant data storage needs that compares the economic benefits of network storage versus direct-attached storage.
"We've told our clients they should buy nothing but network-attached storage going forward," he says.
According to the calculations Forrester recently prepared for clients, companies can save approximately $4 million on a $14 million dollar data storage budget over five years by using network-attached storage.
"The reason is capacity utilization," says Rutstein. "You only have to pay for what you need."
Gartner analyst Cox says Kumar is correct, technically speaking, when he says that SAN and NAS networked storage technology does not, in general, offer better reliability or performance over previous technology. (In computer terms, reliability means the system does not crash, while performance usually refers to the speed with which data can be accessed).
But Cox adds that reliability and performance are not the only considerations and that total cost of ownership will loom much larger, particularly as companies become ever more dedicated to cutting out unnecessary costs.
And on that point Kumar agrees, at least partially.
"From an information technology perspective, one of the benefits of the current economic slump is that new deployments have slowed enough to allow more time to be spent managing current systems and their storage," he writes.
"The silver lining in today's situation for network storage companies is that the broad market is being re-acquainted with those problems and the potential for solving them with new technology."
But in the meantime, Kumar says it would be a mistake to expect much additional share price appreciation in the group, at least, over the short-term.
"We do not believe that any of the storage networking stocks warrant their inflated valuations on uncertain earnings estimates," he says. |
