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A Cheap Valuation and Infrastructure Growth Make This Tech Stock a Solid Investment

June 26, 2014 | About:

Brocade Communications (NASDAQ:BRCD), the networking infrastructure and solutions provider, has been consistent with its performance as its stock is up in the teens this year. However, its recently declared quarter wasn’t that great. Nevertheless, the company is expected to put up a better show going forward. Let’s have a look at its recent results and its long-term prospects.

A decent performance

Brocade posted revenue of $565 million, an increase of 1% sequentially that exceeds its own outlook for the quarter. Also, its non-GAAP earnings of $0.24 per share topped market estimates, along with non-GAAP operating margin up by 440 basis points.

Besides, Brocade expects comparatively higher operating cash flow due to the timing of variable compensation payments and interest payments on bonds in the ongoing quarter. Also, it has been observing a good improvement in the business that should help the company put up a better financial performance going forward.

Strong opportunities ahead

Brocade has witnessed strong demand for its Storage Area Networking products, which reflects tremendous recovery in the storage market. Though Brocade observed lower revenue in IP networking, yet it was well within the range of its guidance. Besides, the company has experienced solid involvement of customers with increased sales activities in Ethernet fabric. Its net fabric sales were up 61% as both enterprise and search customers put into operation next generation networks to support their increasingly virtualized data centers.

In addition, the company has observed strong demand in its fiber channel in high-growth storage technology markets such as solid state drives as Silver OEMs and other storage vendors were busy releasing SSD-based storage arrays, including fiber channel connectivity. Moreover, its fiber channel has an ability to deliver high bandwidth capability, record data accessibility, and to provide world-class reliability which is driving its SSD market. Additionally, the fiber channel delivered superior sales while reducing cabling, complexity, and other management costs compared to fiber channel for Ethernet FCOE.

Apart from this, Brocade’s continuous efforts to strengthen its ecosystem have become accretive to its profit. Its Gen 6 fiber channel is expected to be available in 2016, and this could be another growth driver.

Brocade has also made tremendous improvements in its IT business with its strategy of being a network provider of choice across data centers. Data center networking is undergoing a technology transition that includes fabrics, SDNs (Software Defined Networks), and NFVs (Network Function Virtualizations). These technologies are playing an increasingly important role in the field of IP networking customers and offer new selling opportunities for Brocade.

Also, the company has experienced a sudden increase in customer engagement as a result of its open and differentiated capabilities in SDN and NFV. In addition, the company was able to win some crucial vendor capabilities at tier 1 customers as a provider of NFV and SDN solutions and new technologies that are more cloud-based while reducing capital expenses. This is driving its sales and the company expects this momentum to carry on going forward.

Furthermore, Brocade’s leadership in NFV provides it with new roles at prominent customers. In fact, it is currently working with five of the top 10 service providers worldwide on this technology. Brocade is also expanding its technology leadership through a continued focus on SDN and NFV. In fact, it has decided to invest in software networking to increase its expertise by expanding its technology team and recruiting top engineering talent. It is believed that these technologies will continuously evolve and Brocade is firmly committed about leading the NFV and SDN market.

Valuation and conclusion

Brocade trades at a trailing P/E of 14.7 and a forward P/E of 11.4 which is reasonably good and indicates strong earnings growth in the future. Moreover, analysts have predicted an earnings CAGR of 10% per annum for the next five years.

I think Brocade is a good investment at a reasonable valuation. So, investors should definitely think of buying the stock for the long run as it is sitting on a lot of opportunities to grow the business and is also trading at a cheap valuation.

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