Aliso Viejo-based QLogic Corp. and Costa Mesa’s Emulex Corp. have parted ways on Wall Street in recent weeks, after moving in tandem for years.
And the one taking the better road,Emulex,might come as a surprise.
QLogic, long one of Orange County’s best performing technology stocks, finds itself in the odd position of taking heat from Wall Street.
At the same time, Emulex, which spun off QLogic in 1994, is seen growing sales and profits at a faster clip than QLogic for the rest of the year.
That has some analysts lauding Emulex as an alternative for grumbling QLogic shareholders, who’ve seen their shares fall 26% from a February high.
With a recent market value of $2.8 billion, QLogic still is more valuable than Emulex, which checks in at $1.5 billion.
And QLogic is growing, just not as quickly as analysts expect for Emulex. According to Wall Street estimates, QLogic’s sales growth for the recently ended June quarter are seen coming in 21% higher than a year earlier. Earnings could be 19% higher.
For the current quarter ending in September, analysts see QLogic’s sales rising 19%, while profit could expand by 10%.
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QLogic counts yearly sales of about $650 million. But growth projections are more impressive for Emulex, which counts yearly sales of about $370 million.
Estimates have Emulex’s sales for the June quarter coming in 22% higher than a year ago. Analysts hope to see profits that are 26% higher than a year ago.
But it’s the September quarter analysts really are excited about. Come fall, they see Emulex’s sales up 45% and profits up 118%.
“We believe that Emulex remains on a clearer path to growth versus QLogic,” J.P. Morgan analyst Mark Moskowitz recently wrote after cutting his projection for QLogic in the recently ended quarter.
The shift in opinion has played out in the stocks of the two companies. Since April, Emulex’s shares have climbed 16%. QLogic’s are off by about 10%.
The change is big. For much of the past decade, QLogic and Emulex have tracked each other, with QLogic pulling ahead in the late 1990s. In the past five years, the two stocks have been neck-and-neck,until recently.
So why the reversal? A tiny piece of electronics known as a host bus adapter.
Host bus adapters are circuit boards that allow for data to be accessed across a computer network by multiple servers and users. They’re a staple of corporate networks and other big data repositories.
Half of QLogic’s business comes from host bus adapters. About a fifth comes from controllers for disk drives.
It used to be that analysts liked QLogic’s diversification,versus Emulex’s focus on host bus adapters for 85% of its sales.
Controller Issue
But now they worry about QLogic’s controllers for drives. Japan’s Hitatchi Ltd., one of QLogic’s two biggest buyers of controllers, has seen a lot of “volatility,” said Aaron Rakers, an analyst with A.G. Edwards & Sons Inc.
Like Emulex, QLogic is seeing strong demand for host bus adapters.
“But the hard disk controller business is what’s weighing on the stock,” Rakers said.
Emulex’s reliance on adapters,once seen as vulnerability,now is a benefit, according to analysts.
The company is seeing demand from makers of data storage computers, including EMC Corp., Hewlett-Packard Co. and IBM Corp.
“In past, Emulex was so heavily tied to the (host bus adapter) market while QLogic was the more diversified company,” Rakers said. “Right now you have a divergence.”
Emulex and QLogic dominate the market for host bus adapters, ringing up more than two thirds of the segment’s sales.
Smaller rivals include San Diego’s Applied Micro Circuits Corp. and Palo Alto-based Agilent Technologies Inc.
“The market itself has become a duopoly,” Raker said.
Emulex’s focus comes at a good time. Companies are upgrading servers they have and buying new ones.
Of course, the dynamic between Emulex and QLogic could change again. Emulex has borrowed a page from QLogic and is trying to move into other products.
