Investors boosted shares of Brocade ( BRCD) and other storage stocks a day after the company bucked trends and said sales would grow in the current quarter. In early afternoon trading, Brocade was up 74 cents, or 4.9%, to $15.79. McData ( MCDT) gained 21 cents, or 2.1%, to $10.35; Emulex ( ELX) was up 15 cents, or 1%, to $15.80, and Network Appliance ( NTAP) added 21 cents, or 2.3%, to $9.21. But despite the easygoing response from the market, analysts who follow the company split sharply on the takeaway from yesterday's earnings call. Some sounded a note of relief that its outlook wasn't worse. "We are pleased that Brocade reiterated estimates, given the rocky environment," wrote Deutsche Bank analyst Sabrina Ricci, who has a buy rating on the stock. Bear Stearns slashed its price target from $40 to $20, but kept an attractive rating on Brocade given "strong end-customer interest" in storage and the company's dominant position in the switch market. Others sounded far more skeptical. At Lazard Freres, analyst Luke Fichthorn complained about Brocade's "extremely shallow disclosure" on the call, pointing to the company's refusal to give the breakdown between sales of switches and higher-end director products.
Fichthorn, who has a sell rating on the shares, dropped his price target from $12 to $10 -- a move implying the stock could drop nearly 40% from today's levels. "With fewer data points from management, we are forced to make some assumptions: it looks like switches have fallen apart and are going to get worse," he said in a research note contending that Brocade's core business of switches is being "severely cannibalized" by a new, higher-end class of products. He concluded that switch sales may have actually declined 5% sequentially in the third quarter and predicts revenues for the line could drop another 16% in the fourth quarter. Fabric switches account for somewhere around 70% of Brocade's total revenues, though the company refused to give specifics. Despite the fact that high-margin software grew as a portion of sales -- rising sequentially from 10% to 15% -- Brocade's overall margins stayed flat with the prior quarter. That implies that hardware margins fell, pointed out Fichthorn. Aside from any fundamental weakness, Fichthorn and other skeptics on the stock say it's simply overpriced. Brocade currently trades at 36 times 2003 earnings. That compares to an average of 27 times for its peer group, which includes the likes of McData, Network Appliance, Emulex and QLogic.