One of the last standing myths about networking investments fell hard Wednesday.
Cutbacks in purchases by cash-strapped equipment buyers forced
Foundry
(FDRY)
to
warn Tuesday evening that it would fall far short of fourth-quarter profit and sales expectations. The news set off an avalanche among the communications equipment stocks and a flurry of downgrades across the sector.
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Foundry's warning exploded the belief that data networking equipment, unlike voice network equipment, would be immune to the spending slowdown troubles that have plagued the larger network equipment market.
Foundry lost more than half of its value, falling $17.38, or 56%, to $13.25. Rival
Extreme Networks
(EXTR) - Get Report
plunged $14.50, or 29%, to $34.37, having dropped 56% of its value in a week. And
Cisco
(CSCO) - Get Report
found a new 52-week low, losing $4.50, or 11%, to $37.25 at midday Wednesday.
While numerous bearish investors had foreseen the indiscriminate nature of the spending pullback among cash-starved phone and Internet service providers, the sell-side bulls argued there would always be shelter in next-generation Internet equipment. The thinking, until today anyway, was that network operators would stop buying traditional gear and shrewdly spend on new, faster technologies.
Foundry is among a group of companies including Extreme, Cisco and
Nortel
(NT)
that make Web switches and routers, the devices that send and manage traffic around the edge of the Internet. Conventional wisdom held that as Internet traffic multiplied so too would the demand for Internet gear.
News to the contrary seems to have blindsided some of the research shops on Wall Street. Among the downgrades Tuesday morning,
Merrill Lynch
lowered Cisco to accumulate from buy, citing "the first indication that service provider
spending issues may be impacting demand for next generation switching solutions."
Duh. Or would that be putting too fine a point on it?
