In following Cisco (CSCO) as closely as I have, I recently realized that I have (at times) neglected some of its peers or its competitors that are also doing well within the space. Admittedly, I might have “forgotten” them on purpose, because what investor (truly) wants to give any glory to the competition? When it comes to our investments, objectivity becomes overrated.
We have seen examples of this within every Sirius (SIRI) versus Pandora (P) article, as well as those that discuss Apple (AAPL) versus Google (GOOG) or those that inject any hint of Research In Motion’s (RIMM) demise. Throw in Microsoft’s (MSFT) decade-long sluggishness and mention its trajectory towards obscurity and the language of drunken sailors litters each article. It is truly remarkable how sensitive we become to the extent that we argue that a large pie within any market should never be shared, much less think that the competition deserves any remaining crust.
The market’s behavior this year has taught me many valuable lessons, and as it draws to a close, I’m getting a head-start on some resolutions. One of these lessons deals with what I’ve mentioned above – maintaining objectivity and increasing the distance between myself and the stock. This is another way of saying “don’t get too attached.” In the market it’s always about growth, and I think that should also be the objective in what we do as investors.
In my attempt at growth, one of the things that I plan on doing is more closely following the competition of the stocks in which I have invested. The goal is that hopefully, not only will this result in my becoming better investor, but also a better writer.
In this pursuit I recently become enamored with one of Cisco’s competitors, Brocade (BRCD). While it is not yet on the level of the other prominent names in the space, such as Juniper (JNPR) and Hewlett-Packard (HPQ), I think it is a name that may be an up-and-comer – particularly one that should fit the strategies of aggressive investors who like turnaround stories.
In its recent Q4 earnings announcement not only did it beat its projected numbers but it also raised guidance. But the question is, what did it prove? I’m starting to get the itchy finger, but I know it remains one of the “little guys” in Cisco’s way. As Cisco continues its turnaround there is a good chance that Brocade may likely become a casualty. But that is not to take away from the many accomplishments that it has logged this year considering the markets early reaction to its once perceived inability to compete.
Looking at it from a bearish lens, “impressive” would not be the way that I would describe Brocade’s fourth-quarter results. It reported flat revenue on a year-over-year basis and less than 10 percent sequential. Revenue for its network storage service was down 4 percent from the previous year, but this was offset with an 11 percent growth from smaller areas of its business – notably IP. But regardless of how one looks at it, it can’t be discounted that it did beat consensus estimates on both year-over-year declines and its end of range. To top it off, profitability was a huge plus.
In 2008 Brocade took a page out of Cisco’s book and acquired one of its competitors, Foundry Networks – one that seems to now be paying off. In its acquisition, management sought to broaden the company a little bit more and place less dependency on its storage business. The other advantage was it wanted to be able to sell networking gear to its existing customer base to provide the services of a one stop shop, a strategy that is now proven to have worked or at the very least currently working.
There is no denying that Cisco is clearly the market leader, and it's not going away. But Brocade is proving that it can do just fine with a small piece of the pie. This has also proven to be the case for other Cisco competitors such as F5 (FFIV) as well as Aruba (ARUN). But the sad reality for them is that (as we started discussing earlier) growth continues to be a challenge.
As Cisco has shown to have done over the past two quarters by regaining its Wall Street darling status, Brocade has launched a turnaround of its own from having issued not only meager projections, but also questionable managerial execution. As a Cisco shareholder, it pains me to want to see Brocade succeed. But who doesn’t like an underdog story?
I have to say that the stock is worth a long look at current levels – particularly as it is widely assumed that the worst is behind it. There are a lot of questions that needs to be answered, but from a risk-reward point of view, it’s one that is worth taking a chance on.