A Winning Technology Bet You Shouldn't Ignore

QLogic is involved in the design and marketing of network infrastructure products for computer data communication. The rise of portable devices and the need for data has increased demand for the company's products.

May 23, 2014 at 9:00PM

The portable/handheld device segment is receiving a lot of media coverage and investments. While investors are vigilant not to miss any opportunity in the handheld segment, other enabling industries are continuously overlooked. One such opportunity is QLogic (NASDAQ:QLGC), whose fiber channel and ethernet adapter business is directly connected to the growth of data and connected devices.

The company's acquisition of ethernet-related assets from Broadcom (NASDAQ:BRCM), and leadership in the high-growth fiber channel market, present a strong case for growth. The company's primary clients include IBM, Dell, and Hewlett-Packard, which accounted for nearly 56% of total revenue in fiscal 2013. HP was the largest customer, with a 24% contribution to the revenue share. 

Market performance


Source: Yahoo! Finance

The stock grew by around 16% in 2013, as the company consistently beat analyst estimates during the year. However, a decline of 14% in 2014 almost neutralized last year's gain. Future earnings estimates are not projecting substantial growth and, hence, the stock is not expected to grow within the next year or so. But, market indicators should not be viewed in isolation, and factors like industry prospects and competitive positioning will also affect the performance of the stock going forward.

Industry prospects



Crehan Research predicts that the data center switch market will reach $16 billion by 2017. According to the report, ethernet and fiber channel over ethernet, or FCoE, will become an ever-increasing portion of the market. IDC predicts continued growth for fiber channel port and revenue over the next four years. 16G FC is expected to grow at a CAGR of 52% (2011-2016). Crehan projects a 40% CAGR for Gen 5 16G fiber channel until 2016. To summarize, the need for data will drive the growth of infrastructure products, and fiber channel is expected to be the fastest-growing segment.

Competitive positioning of QLogic
QLogic has been lagging behind Emulex in the converged data center network adapter market, but making headway in the fiber channel adapter market. It held approximately 55% FC market share in Q3 2013, compared to 40% by Emulex. Moreover, the company's 16Gb FC market share grew by 12%, compared to a 5.9% decline in Emulex's share. In calendar year 2013, QLogic held approximately 54% of the fiber channel market, 12% more than the nearest competitor. The point is that QLogic is gaining ground, most likely because of product superiority, in the fast-growing FC market. This is a notable competitive strength of the company and will help future growth.

Recently, QLogic acquired certain ethernet control-related assets from Broadcom. As a result, it is on its way to becoming the second-largest player of the ethernet adapter market later on this year, and the market opportunity will rise to $1.2 billion in 2016, according to management. Hence, these assets will contribute toward the revenue and earnings of the company from the first quarter of fiscal 2015. Moreover, QLogic purchased Brocade's adapter business, and both companies agreed to collaborate on fiber channel technology enhancements. This development will also contribute to QLogic's bottom line and strengthen its product portfolio, which is expected to grow by 10%-12% during fiscal 2015.

Investment value
The revenue and EPS of the company are expected to grow in the coming year or so. Analyst estimates also indicating revenue and EPS growth.


Source: Yahoo! Finance and SEC filings

The graph reveals a growing trend for both revenue and EPS going forward. A growing market share in FC, consolidation brought about by the Broadcom and Brocade asset acquisitions, and overall industry growth will be the primary reasons for this trend. The forward P/E of the company is approximately 10.5, below the industry average P/E of 16, provided by Reuters. This means that the stock is trading relatively cheaply and has some upside potential.

Bottom line
The rise of portable devices and need for data has affected the infrastructure equipment industry, just as it has affected almost all technology sector industries. Infrastructure adapters and switches are expected to grow at a decent rate in the coming years. Fiber channel will be among the top growth segments of the industry, benefiting QLogic due to the company's FC technology dominance. The company will also grow in the ethernet space, thanks to its Broadcom asset acquisition, which should add to its bottom line. Based on these facts and figures, QLogic is a good investment.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Muhammad Saeed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information