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Analysis: Brocade

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This is the next of a series of posts on storage companies.

** DISCLAIMER: This and related blog entries are for fun only and do not represent investment advice. You should make your own opinions on investments or consult a financial adviser **

Background

Brocade Communication Systems Inc is one of the leading manufacturers of storage networking hardware. As one of the original developers of the fibre channel protocol, Brocade is positioned at the centre of storage networking technology. In addition to storage hardware, Brocade also markets and sells FAN technology, including Wide Area File Services and file virtualisation software.

In January 2007 Brocade purchased (merged with) McDATA Corporation reducing the major players in the fibre channel market from three to two.

Market Details

Brocade is quoted on the NASDAQ market with the ticker code BRCD.

Shares Outstanding: 389,774,000
Market Capitalisation: $ 3,617,102,720
Earnings Per Share: $ 0.54
P/E Ratio: 17.19
Yield: None

Figures from http://www.nasdaq.com/ on 6 November 2007

Brocade does not declare dividends, so all future value in the shares needs to be gained from the increase in value of the shares. With a P/E Ratio of over 17, Brocade’s shares are priced to expect future value. Clearly as an investment, the question is whether this is likely to occur.

Competitors

As previously mentioned, Brocade merged with one of their major competitors in January 2007. In the fibre channel switch space, this leaves Cisco Systems as the only major competitor for high end fibre channel switches. In the FAN market there are many competitors, including Acopia, Netapp, EMC/Rainfinity and others.

Outlook

The fibre channel market is maturing and as such, growth in this market is incremental. Port prices (the usual way FC hardware is sold) have reduced from over $2000/port to less than $500 in the current market. Brocade are certainly not bringing anything new to the party in terms of their FC business. In fact, FC is likely to be eroded by iSCSI and potentially FCoE (Fibre Channel over Ethernet) which poses the possibility of relegating expensive fibre channel hardware in favour of standard Ethernet technology.

Consequently I see times being tough for Brocade. The McDATA purchase wasn’t an easy one. McDATA were on a slide and I believe Brocade acquired them for market share and their customer base. In the FC space, integrating the McDATA technology with that of Brocade initially proved a nightmare as the roadmap for FC wasn’t clear. Brocade now faces a significant challenge against Cisco and so needs the other non-FC markets to grow their business. For a company that currently does not declare dividends that makes the stock purchase a simple one; how quickly will revenue and profit grow to increase the asset value of the shares?

I think slowly and so I’d make Brocade a “hold”.

On the subject of Seagate, Stephen posted and asked whether I saw it as a sell, hold or buy. At this stage I think I would like to hold a hard disk manufacturer in my virtual portfolio, however whether that is Seagate or WD (Western Digital) remains to be seen. I’ll make the decision once I’ve evaluated WD.

About Chris M Evans

Chris M Evans has worked in the technology industry since 1987, starting as a systems programmer on the IBM mainframe platform, while retaining an interest in storage. After working abroad, he co-founded an Internet-based music distribution company during the .com era, returning to consultancy in the new millennium. In 2009 Chris co-founded Langton Blue Ltd (www.langtonblue.com), a boutique consultancy firm focused on delivering business benefit through efficient technology deployments. Chris writes a popular blog at http://blog.architecting.it, attends many conferences and invitation-only events and can be found providing regular industry contributions through Twitter (@chrismevans) and other social media outlets.
  • Stephen

    Chris,

    Hold is probably a fair call as there is not much else to do. It is odd that since McData was purchased by Brocade, the McData switches are considerably cheaper than the Brocade switches and I know people who still prefer to buy them.

    Cisco is going to have real problems in this market if they can’t do something about speed. I am a die hard MDS fan but in reality, they have a lot of catching up especially now that virtualisation (eg VMWare) is going over the top. The HP C Class enclosures have grunt with their 8 way (two CPU with four cores) blades. If you go virtual connect, you are going to hammer a MDS if you have the 48 port 4 Gb cards. I asked Cisco about this and to be honest, they don’t seem to have much right now or in the near future.

    Is this the re birth of Infinband?

    Stephen

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