Brocade Should Show Upside

Recent results from EMC(EMC) and NetApp(NTAP) have highlighted increased storage spending, with Brocade expected to reap the benefits.

Brocade's results should also offer some color on the company's ongoing battle with Cisco.

A recent survey of the IT sector by Goldman Sachs showed increasing pricing pressure in Ethernet switching, reflecting increased competition from "up-and-coming" companies such as Juniper(JNPR), Hewlett-Packard and Brocade.

"So far, heightened competition has resulted in share loss (from 75% in 4Q2008 to 69% in 3Q2009, according to Dell'Oro) rather than pricing or margin compression for Cisco," wrote Goldman Sachs analyst Simona Jankowski. "Though that could change depending on Cisco's priorities for share vs. margins."

The analyst, however, warns that there are still clouds of uncertainty looming over the economy, as well as the challenge posed by its Foundry acquisition.

"Downside risks include further deterioration in enterprise spending and the company's execution in managing a far larger product portfolio," she wrote.

With a fast growth profile and high operating leverage, though, Brocade may still offer value for investors. The company will hold a call to discuss its fourth-quarter results early on Tuesday, which is expected to provide more insight into its long-term strategy.

-- Reported by James Rogers in New York.

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