A basic business day of memos and PowerPoint presentations add up to lots of data that companies need to store and retrieve across far-flung computer networks. To keep up, companies need to buy so-called network storage. But does this growth in demand warrant investor interest in two of the biggest network storage vendors, Brocade Communications Systems (NASDAQ:) and QLogic (NASDAQ:)?
The network storage industry is big and growing fast. According to Infonetics Research, in the first quarter of 2011, the so-called Storage Area Network (SAN) switch-and-adapter market to $755 million. Infonetics cites the tremendous demand for cloud storage in estimating the market will grow at a 20% annual rate through 2015 and ending that year at three times its 2011 revenues.
And Brocade and QLogic are significant players there. Brocade claims to have , and in 2010, QLogic claimed it controlled — “Fibre Channel” adapters.
Brocade reported better-than-expected financial results Tuesday and its shares rose 6%. Its quarterly revenue of $550 million and EPS of 16 cents compared favorably to analysts’ expectations. According to Barron’s, those expectations were for
, and Brocade beat them by 4% and 60%, respectively.
Moreover, Brocade looks to beat expectations in the current quarter as well. That’s because it forecasts revenue in the range of $530 million to $550 million and adjusted EPS ranging from 12 cents to 14 cents — and both are above analysts’ forecasts of $535 million and 11 cents, according to Barron’s.
When QLogic reported its second-quarter results at the end of October, revenues and EPS were ahead of expectations. QLogic’s 2.5% higher revenues of $150.2 million were better than expected, and its unchanged-from-2010 adjusted EPS of 28 cents were .
Here’s what the investment choice between Brocade and QLogic boils down to:
- Brocade: Barely growing, narrow margins; cheap stock. BRCD’s sales have increased 2.7% in the past 12 months to $2.2 billion, while net income has plunged 57% to $51 million — yielding a narrow 2.4% net profit margin. Its price/earnings-to-growth ratio of 0.62 (where a PEG of 1.0 is considered fairly priced) is inexpensive on a forward P/E of 10.1 and expected earnings growth of .
- QLogic: Strongly growing, wide margins; cheap stock. QLGC sales have risen 8.8% in the past 12 months to $610 million, while its net income soared 153% to $145 million — yielding a whopping net margin of 23.7%. Its PEG of 0.86 is cheap on a P/E of 10.4 and expected earnings growth of .
QLogic wins this SAN faceoff. Its valuation is very compelling for a solidly growing company with attractive profit margins. Brocade seems to be lagging, but it could be a takeover target for the likes of Dell (NASDAQ:) and might be an interesting holding for that reason alone.
Based purely on standalone fundamentals, QLogic is the better bet.
As of this writing, Peter Cohan did not hold a position in any of the aforementioned stocks.
