Brocade Communications

(BRCD)

saw its shares tumble 14% to $6.38 Wednesday after an analyst questioned the company's ability to maintain its margins in the face of stiffening competition.

Bear Stearns analyst Andrew Neff downgraded Brocade to peer perform from outperform, citing concerns about competition within the switch market, profit margin erosion and the lack of a valuation catalyst for the stock. Neff also lowered earnings and revenue estimates for fiscal 2003, projecting full-year operating earnings 30 cents a share on revenue of $633 million. His previous forecast was 35 cents and $670 million.

"Brocade is reportedly considering a reduction in workforce, taking steps to reduce cost and expense levels, highlighting the tough business conditions for the company," Neff said in a research note. "Given the soft demand environment, we would expect a cautious tone on the outlook from the company when it reports fourth-quarter results on Nov. 21, 2002," he added.

On Tuesday, the company announced that it would acquire privately held switching-equipment maker

Rhapsody Networks

for roughly $175 million in stock, in an effort to beef up its storage products arsenal and help trim expenditures.

That led Deutsche Bank analyst Sabrina Ricci to cut her rating to hold from buy Wednesday.

"In the future, the strategic arguments for this acquisition may well be justified," Ricci told clients in a note. "However, at present, we believe the reasons to own Brocade become less compelling."