QLogic, Emulex Shares Slump
By ANDREW SIMONS
Talk about being grounded.
Shares of Aliso Viejo-based QLogic Corp. and Costa Mesa’s Emulex Corp.,two of the strongest technology stocks during the sector’s downturn,have had trouble finding their wings in the past six months.
So far this year, there’s been a revenue shortfall at QLogic, cautious talk from Emulex and Wall Street skepticism about growth prospects for the companies. QLogic and Emulex make circuit boards that link together computers in data storage networks.
QLogic’s shares are down 50% since the start of the year while Emulex’s are off 38%.
“There’s been a lot of investor talk about” Emulex and QLogic, said Shaw Wu, an analyst with the San Francisco office of Greenwich, Conn.-based American Technology Research Inc., which advises institutional investors. “We’re taking a wait-and-see approach.”
This is unfamiliar ground for QLogic and Emulex. During the downturn of 2001 to 2003, both stocks posted decent returns as the companies posted higher profits.
Starting in January, both companies got a jolt. First, there was speculation that new competition in the market for host bus adapters,used to link data storage computers,would chip away at their market shares. QLogic and Emulex control more than two-thirds of the host bus adapter sales.
Then in March, QLogic said revenue for the first three months of the year would be lower than what Wall Street had expected. The result was a punishing 26% drop in its shares the next day.
The company blamed the decline on delayed buying by two major customers, believed to be Hewlett-Packard Co. and Sun Microsystems Inc.
“We experienced weaker than expected demand,” QLogic Chief Executive H.K. Desai said in a statement.
Emulex had its own bad news for investors at a recent conference in New York. The company reported “choppy” demand, according to one analyst. The comments prompted a 13% plunge in Emulex’s shares earlier this month.
Both companies say they’re confident about their prospects for the rest of the year and that the trouble is just a short-term blip.
Not everyone is convinced.
“The problems could be deeper than that,” analyst Wu said.
Wu said he wonders whether the host bus adapter market has matured.
“One of my questions is what will be the real growth rate,” Wu said. “A few years ago, host bus adapter penetration was relatively low. Host bus adapter penetration may not have peaked, but it’s hit some tougher comparisons in the Fortune 500 accounts.”
Wu was more succinct in a report issued last week.
“Our concern with QLogic and Emulex has been more about growth than with margins,” he wrote.
But profits also could become a worry.
Last year, Applied Micro Circuits Corp. bought fellow San Diego company JNI Corp., a smaller maker of host bus adapters. JNI, once troubled, is going full bore after the host bus adapter market with the backing of Applied Micro, which counted $1.6 billion in market value last week.
There’s other competition. Companies such as Milpitas-based LSI Logic Corp. could snare market share from QLogic in another area: chips for disk drive controllers and storage area networking.
Not everyone is worried.
Merrill Lynch & Co. analyst Shebly Seyrafi upgraded QLogic shares last week, blaming the recent decline in the company’s stock on Emulex’s cautionary talk.
“This comment likely led to emotional selling of the shares of QLogic and Emulex,” Seyrafi wrote in a report. “We do not believe that QLogic would agree with this comment relative to its own business if the comment were construed in the negative sense.”
QLogic’s host bus adapter sales could pick up this quarter, by as much as 5% from the prior quarter, Seyrafi wrote.
And Emulex could be in for expanded operating profit margins, according to American Technology Research’s Wu, going from 32% now to about 35%. The gain stands to come from Emulex’s buy last year of Bothell, Wash.-based Vixel Corp., Wu said.
“We think investors will ‘re-realize’ that storage actually is one of the highest growth markets in technology and that (storage area networks) remain the best architecture for large enterprises to manage their bit growth,” Wu said.
