Brocade's a Buy - TheStreet

Brocade's a Buy

Brocade, which reports its first-quarter results after market close, may present a buying opportunity for investors.
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SAN JOSE, Calif. (

TheStreet

) -- Switchmaker

Brocade

(BRCD)

, which reports its first-quarter results after market close, may present a buying opportunity for investors looking for a cheap technology stock with upside potential.

Brocade, the storage networking specialist

took a fourth-quarter profit hit

as costs offset a revenue hike. Its stock has fallen around 25% since mid-November when analysts raised concerns about competition and the strength of the company's

partner strategy

.

Now trading just below $7,

Brocade's stock is attractive

to many, thanks to its low valuation.

Analyst Love for Brocade Not Enough

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"We think the recent selloff in Brocade shares creates a compelling entry point," wrote Simona Jankowski, an analyst at Goldman Sachs, in a recent note. "Our 12-month price target is $10.50 representing about 60% upside from current levels."

These sentiments are echoed by Munjal Shah, an analyst at Jefferies & Co.

Despite intensifying competition and fears that sales of Brocade's Ethernet products through other tech companies are slow to materialize, Shah maintains his $9 price target and 'buy' rating on the company's stock.

"Our checks suggest

Brocade's core storage segment met internal expectations," he added, explaining that sequential storage growth is likely to exceed Jefferies' estimate of 5.5%. "

But Brocade's stock has been pressured lately due to concerns about its Ethernet IP business."

Analysts surveyed by Thomson Reuters expect Brocade to report revenue of $548.43 million, up from $431.6 million in the same period last year. Excluding items, the company is expected to report 15 cents a share, flat compared to the prior year's quarter.

Brocade certainly faces a changing competitive landscape. Last year, for example,

Hewlett-Packard

(HPQ) - Get Report

spent

$2.7 billion to acquire networking specialist 3Com (COMS)

,

a shock move which placed Brocade in the spotlight

.

Brocade had been

touted as a possible H-P target

prior to the 3Com deal, and the acquisition contributed to the slump in Brocade's shares.

The H-P/3Com deal is also expected to impact Brocade's partner strategy. Brocade is a longtime partner of H-P, which rebrands the company's storage switches, and there had been talk of a similar deal for Brocade's IP networking products.

With 3Com under its wing, however, H-P is less likely to sign an Original Equipment Manufacturer (OEM) deal for Brocade's Ethernet IP offerings. More recently, H-P also clinched a deal with Brocade rival

QLogic

(QLGC)

to

sell its 8-Gbit/s Fibre Channel switches

.

Additionally, Jefferies analyst Shah warns that Brocade is facing big challenges as it attempts to ramp up its OEM efforts elsewhere.

"We believe traction for IP products in the OEM channel is limited," he wrote. "Our checks suggest sales through

IBM

(IBM) - Get Report

are still small and Brocade may be shifting more resources on its original IBM team."

DELL

(DELL) - Get Report

, however, is relatively more aggressive in pushing Brocade's products, according to Shah, although this is dependent on Dell's ability to compete and gain share in data center networking.

Brocade could also face a major threat in the shape of

Cisco's

(CSCO) - Get Report

UCS

device. This marked the networking giant's entry into the blade server market, enabling Cisco to present itself as a sort of Swiss army knife for the data center.

There is a possibility, though, that

UCS could actually boost Brocade's business

, pushing Cisco rivals such as

IBM

(IBM) - Get Report

closer to the storage specialist.

Confronted with a fiercely competitive environment, Brocade has made at least one shrewd alliance with one of the

hottest companies in the security space

.

Last week Brocade announced a network security partnership with software maker

McAfee

(MFE)

, which prompted a

flurry of activity in Brocade's shares

.

-- Reported by James Rogers in New York

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