QLogic

Despite efforts to differentiate itself from the pack, QLogic Corp. (Nasdaq: QLGC) can't seem to shake the label of being "one of the crowd" in the public-company storage networking arena.

Of course, sometimes that's not a bad thing -- like earlier this week when a small rally pushed many SAN-sector stocks higher (see Tech Rally Boosts LR Index). But even with the boost, the Aliso Viejo, California-based QLogic remains far below its yearly high, and it's still underneath the $40-range target price set by Wall Street analysts covering the firm. And several firms recently cut earnings estimates for QLogic's second fiscal quarter 2002, which closed at the end of September.

In spite of this, almost all analysts covering the company rate QLogic a Buy, expecting its business to pick up sometime next calendar year.

It's easy to see why Wall Street types would like QLogic, a profitable and growing company that has leading products in several cutting-edge sectors, including Fibre Channel switching and host bus adapters (HBAs).

For its first fiscal quarter of 2002, which ended July 1, the company reported earnings per share of 20 cents on $92 million in revenues -- a 19 percent increase in revenues from the same quarter a year ago."I like QLogic as a key player in the SAN space over the next few years," says Kevin Hunt, an analyst with Thomas Weisel Partners. Hunt, who reduced QLogic earnings estimates for the most recent quarter (due to the slowdown related to the Sept. 11 terrorist attacks), rates the firm a Buy with a target price of $36 per share.

"The company is well diversified from a product standpoint, it is a low-cost producer, and it remains ahead of the curve on new technologies like Infiniband and iSCSI," Hunt says. "The valuation had been looking pretty attractive, although a bit less so after the huge move [earlier this week]."

This week's market upswing has boosted QLogic's stock by about 50 percent. Shares moved from a close on Monday of $17.99 to flirtations with $28 per share in trading Friday. Still, that's far below the $60 per-share range QLogic had during the summer, and it's well below the 52-week high of $132.50 per share it held last year.

Part of the problem may be that investors have a tough time getting a handle on where the company's srengths lie. This perception problem may be related to its diverse product line, which also includes controller silicon and other SAN device chips, as well as SAN management software.

QLogic sells most of its products to large-system OEMs, including Fujitsu Ltd. (KLS: FUJI.KL), IBM Corp. (NYSE: IBM), Dell Computer Corp. (Nasdaq: DELL), and Sun Microsystems Inc. (Nasdaq: SUNW).QLogic also has been part of almost every new-technology consortium of late (see Qlogic Joins Arapahoe ), a mix that may make it harder for investors to discern its direction.

Perhaps because it plays in so many sectors, even when QLogic is ahead in the technology race, it's often eclipsed by a competitor's market share. That's the case in the market for 2-Gbit/s Fibre Channel switches and HBAs. In this market, QLogic is already shipping products, including its 16-port SANbox switch, while competitor Brocade Communications Systems Inc. (Nasdaq: BRCD) is still in development on its 2-Gbit/s products (see Is Brocade's SilkWorm Losing the Thread?).

Of course, how much that matters when Brocade still owns nearly 90 percent of the switch market is the question (see Brocade CEO in Tick-Top Form).

Mark Edwards, senior vice president at QLogic, says the company can't do much about stock price and perceptions, other than to build its businesses as best it can. Specifically, that means staying ahead of the curve on technology advancements, even if products aren't yet on the horizon.

"We have to get involved [on new technologies] years ahead of when they get used in the market," Edwards says, explaining his company's widespread participation in connectivity trials (see InfiniBand Steals the Show) and standards bodies (see QLogic Forms 2-Gig FC Group). Edwards stresses the company's commitment to the latter, saying that without standards, the entire SAN industry won't move forward."The SAN industry needs to follow the LAN model," instead of proprietary methods, Edwards says. "Especially in Fibre Channel, SANs will be stunted if there are no standards."

- Paul Kapustka, Editor at Large, Byte and Switch http://www.byteandswitch.com