QLogic And Intel: Partners In Cloud

Includes: INTC, QLGC
by: Joseph Harry

Intel (NASDAQ:INTC) has formed a symbiotic relationship with Qlogic (NASDAQ:QLGC), a small-cap company that is fundamental in the growing cloud-computing revolution.

From Qlogic's website:

QLogic is a global leader and technology innovator in high performance networking, delivering adapters, switches, routers and ASICs that power today's data, storage and server networks for leading Global 2000 corporations. The company delivers a broad range and diverse portfolio of networking products that include Converged Network Adapters for the emerging Fibre Channel over Ethernet (FCoE) market, Ethernet adapters, Fibre Channel adapters and switches, iSCSI adapters, and routers.

According to a TMCnet interview with Rob Davis, vice president and chief technology officer at QLogic, "the goal of the company is to provide a flexible infrastructure". He continued by stating:

We focus on large OEMs. Our value proposition is to allow them to differentiate their products by customizing our infrastructure components.

These "large OEMs" are primarily Cisco (NASDAQ:CSCO), Dell (DELL), EMC (EMC), HP (NYSE:HPQ), IBM (NYSE:IBM), NetApp (NASDAQ:NTAP) and Oracle (NYSE:ORCL).

QLogic allows these larger companies to brand their adapters, switches and other products relating to networking. QLogic's converged network adapters (CNAs) are popular items that are vital to cloud computing systems. This is where Intel's relationship with QLogic is creating an opportunity for both companies.

In the TMCnet interview, Davis went on to say (in reference to the large OEMs that Qlogic supplies),

All of them use Intel as their processors so it's about how do they differentiate their Intel from the other guy's Intel. Our focus is on the I/O.

He also continued to carefully explain that

This is important because the margin is not in reselling Intel but in the value they add versus what their competitor adds. What we do is allow them to customize the I/O that will give them an advantage or a different feature, or whatever that particularly value that they are looking to provide for their customers.

In other words, QLogic and Intel are major players in converged infrastructure and seem to have a strategic alliance- Qlogic makes the parts, Intel supplies the chips, and then the OEM gets to brand the finished product.

Qlogic also has plans in the works with Microsoft (NASDAQ:MSFT). Qlogic will be providing the cloud enabling solution for the Microsoft Cloud OS and enterprise data centers. Oracle (ORCL) is another company that recently announced a deal with QLogic. Without converged infrastructure, there is no cloud computing market. Qlogic is the leader in converged networking, and is supplying integral components to multiple partners (who may also be competitors). Intel is also sapping in profits from Qlogic's success in other ways.

Intel acquired Qlogic's InfiniBand business in January for a cool $125 million. This gives Intel instant expansion inside the high-powered computing world. It also helps Qlogic, injecting cash into their company and allowing them to focus on what they do best-produce industry leading fibre channels and Ethernet switches and adapters. Qlogic's CEO Simon Biddiscombe commented on the mutually beneficial transaction, stating:

The sale of these InfiniBand assets will benefit our shareholders by enabling us to provide better focus and greater investment in growth opportunities for the data center with our converged networking, enterprise Ethernet, and storage area networking products… After the sale, our cash position will be further strengthened and we expect the impact on earnings per share to be neutral. In addition, the sale of these assets to a leading technology innovator and recognized HPC leader will provide a greater investment stream in high performance fabrics for InfiniBand partners and customers.

Clearly both Intel and Qlogic have big plans as the world moves more and more into high-powered cloud computing. Undervalued Intel would be a solid buy at current levels, especially when considering their generous 4% yield. The semi-conducter giant, Intel, also has it's hand in the chip and (as of late) struggling PC market.

For a more "pure" cloud play, however, the wide-moat, small-cap QLogic could be worth considering as an investment as well. The company is loaded with cash and is protected by a fortress-like balance sheet that contains much more cash than total liabilities.

Disclosure: I am long INTC, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.