McData Slips on Sign of Price War

Which way is the wind blowing today? Just two weeks after a Thomas Weisel Partners research note sent McData Corp.'s (Nasdaq: MCDTA) stock soaring on speculation that the company was taking share from archrival Brocade Communications Systems Inc. (Nasdaq: BRCD), comments from the same firm today sent its stock price into a tailspin (see McData Picks Brocade's Pocket).

McData saw its shares tumble more than 14 percent today, closing at $13.43 per share, after Thomas Weisel analyst Jason Ader issued a note that the company seems to have been hurt by Brocades dramatic price slashing over past weeks. The broader market was flat, with the Nasdaq composite closing up 0.06 percent.

While Ader characterized Brocade’s discounting efforts as a "short-term nuisance," he said that they could potentially hinder McData from reporting the kind of record profits it has seen over the past two quarters (see McData Switches on McProfit and McData, Emulex Rake It In).

Disappointing as this may be, the market reaction to the research note seems a bit harsh. While Ader’s note today wasn’t nearly as upbeat on McData as the one he issued on June 25, he contended that the company’s July quarter appears to be on track, and maintains his Outperform rating and his forecast of 7 cents second quarter earnings on $108 million in revenue. That's the same as the Wall Street consensus.

"Notwithstanding near-term competitive pressures, we are confident in McData’s market position, driven by superior products, strong OEM relationships, and profitable execution," he wrote in the note.Since launching its Sphereon 4500 switch back in October, McData has gradually tunneled its way into Brocade’s share of the sub-32-port SAN switch segment (see Brocade Hit With Q2 Loss). McData’s success appears to have prompted Brocade to slash prices on its 16- and 32-port SilkWorm switches.

Last month, Ader brushed aside concerns that Brocade’s pricing pressure could seriously hurt McData, pointing out that the Sphereon has a less expensive architecture than the SilkWorm switches. "We do not believe Brocade has enough pricing room to foil McData gains," Ader wrote in his June note.

Today, however, Ader gave Brocade’s discounts a bit more weight, pointing out that the company has been more aggressive than expected on price cuts. He adds, however, that competition from Cisco Systems Inc. (Nasdaq: CSCO) does not seem to have affected McData’s quarter. Last month he said Cisco was more of a threat to Brocade than to McData. (Ader could be reached for additional comment by press time.)

The Street, meanwhile, seems to expect Brocade’s "short-term nuisance" to give McData a whopping headache. While McData was getting pummeled, Brocade saw its stock jump nearly 4 percent on the news, ending the day at $6.82 a share.

— Eugénie Larson, Reporter, Light Reading