QLogic Corp (QLGC)

High p/e, over priced or at least at the high limit
Infiniband division may help carry the fibre channel.
Alought working with HPBladeSystem Fibre Channel,
projected out look is flat. Might be ripe for a merger

Let go much of their sales staff. Competition very strong in this space

QLogic (QLGC) manufactures and sells components used in computer data storage networks. The company has 3 primary divisions. Host Products (about 75% of sales) sells host bus adapters, or HBAs, which connect computers to networked storage devices like hard drives or optical media. This division also makes InfiniBand Host Channel Adapters (HCAs), which are used in "supercomputing" applications that require high data bandwidth. The second division is Network Products (~17% of sales), which manufactures Fibre Channel and InfiniBand switches and storage routers. Switches and routers connect different parts of storage networks and route data between them. The final division, Silicon Products, delivers the remaining small portion of sales and is QLogic's legacy business, providing protocol and controller components used in older network architectures.

QLogic has a number of positive factors, one of which is market growth potential. It takes only a rudimentary knowledge of Internet trends to realize the massive amounts of data storage that are required for applications such as social networking, online photo and video sharing, digital distribution of audio and video content, "cloud computing" storage of documents and applications, and so forth. These trends will only intensify going forward, and to efficiently handle storage needs, these storage-area networks (SAN) will become more and more ubiquitous, driving demand for QLogic's products. IDC forecasts a 15% annual market growth for HBAs through 2011, with the overall SAN market growing at an equally impressive 10% annually. SAN vendors are trying to push the technology to medium-size enterprises (it is currently utilized mainly by large firms). Organic revenue growth potential is in QLogic's favor, and the firm has delivered almost 17% annual revenue gains over the past 5 years.

The firm's competitive position in HBAs is strong - they hold nearly 40% market share and form a virtual duopoly with primary competitor Emulex (ELX). It can also be argued convincingly that QLogic is the best run player in the HBA market. They have consistently been taking share from Emulex, who has been embroiled in fighting off a hostile takeover by Broadcom (BRCM). In their newer Fibre Channel businesses (HBAs and switches), QLogic has been grabbing share from competitors such as Brocade (BRCD). In switches, however, QLogic is a newcomer and faces tougher battles. Cisco (CSCO) and Brocade hold dominating market shares here, and are bigger companies with more resources, allowing them to outspend on R&D and marketing, or under-price QLogic if they felt threatened.

The last of the "trinity of investment", financial health, is not an issue here - QLogic is very healthy. The balance sheet shows $340 million in cash and investments, and no debt. Returns on capital are outstanding, averaging 44% on an actual ROIC basis, and 97% on a Magic Formula basis (no goodwill or intangible assets, and using EBIT instead of net income). Free cash flow margin has averaged an astounding 27% over the past 5 years. QLogic has a fortress for a balance sheet and has been a cash cow, just like the best of the tech companies.

So how does QLogic stack up as a potential MagicDiligence Top Buy? Pretty well, and this will be one I keep an eye on as a potential future pick. A few risks concern me. The first is the fast moving nature of technology, particularly evolving tech like SAN equipment. New technologies are forever emerging, both on the high end and low end, creating opportunities for newcomers to get a foot in the door. Also, like most technology, unit average selling prices continue to fall. QLogic has seen its gross margin decline from close to 72% in 2005 to about 67% today, and this deterioration will continue as prices fall faster than input costs. Compounding this problem is QLogic's customer roster, where over 50% of sales are to 3 big customers: IBM (IBM), Sun (JAVA), and Hewlett-Packard (HPQ). If one of these customers decided to drop QLogic, it would be a massive hit to sales. Also, those customers have strong leverage over QLGC to extract price concessions. It's not a desirable situation to be in from a price negotiation standpoint!

Concerns aside, QLogic makes a better than average pick for your MFI portfolio, and could show solid share price gains over the next year as IT spending recovers.

Disclosure: Steve owns CSCO

niche player

This conservative pick in the computers and peripherals industry is a strong buy(LN). And i say especially at after this sell off. Lets buy at 14.62 and check in 12-18 months.

QLogic is doing well vs. rival Emulex, and these two companies own nearly all the fibre-channel host connectivity market. QLogic is likely to make inroads into the low end fibre-channel switch market, which is being neglected by bigger players Cisco and Brocade. More companies are consolidating their ever-expanding data onto storage area networks, so demand for their products should only increase with time.

Increased demand for internet storage.

As investors jump back into market, qlgc will benefit from MM putting dollars into this stock after recent positive stream of good headlines.

I see 20 a share sooner than you may think i call this company one of my safe plays for the year

I liked this stock at 19, so needless to say, I'm a big fan at ~$16/share. The picture has not changed for QLogic and all of the worry over tech stocks created by US recession fears has turned this stock into a no-brainer. The recent downgrade by JPMorgan makes it a great time to pick up QLGC for a nice 12 month play.

Too much cash to ignore and storage is hot. Components not tracking the industry

Seems undervalued

Near 52 week low. QLogic has great fundamentals and a growing business. Thi stock should see it stock steadily rise as more and more information is transferred digitally around the world.

This is a great example of a company with strong fundamentals but no support from the investor community. Looks like the buyers are staying away until closer to expected pick-up in H2. I bought down here in trough and expect to stay here for a few quarters. significantly more upside vs downside from this price vantage

This is the company getting into the way of CISCO. Market niche and good management. I believe it is good take over target.

is in place in product cycle to move higher--have new & more customer's --products woking well--will rise from low'as to $20's

Long term winner with a reasonable P/E. Great time to get in.

The buy point is $23.04

Good management of undervalued market. Techs and this one in particularly likely to gain in next year or two.