JNI Goes From Hot to Hotter in Days Following IPO Richard McCaffery (TMF Gibson)
November 1, 1999
Two years ago, the dotcom companies stunned Wall Street with overnight valuations in the billions. Earlier this year, it was the e-commerce players. Now it's companies like JNI Corp. (Nasdaq: JNIC), builders of hardware and software that speed up transactions on the World Wide Web.
JNI went public October 26 with the sale of 4.9 million shares at $19 each. It closed the first day at $42, good for a 121% climb and a market cap of $1.6 billion. That was last week. Now, it's rising faster than this story is being written, from $58 13/16 to $73 5/8.
The fuel that's firing JNI, of course, is the Internet. As businesses go online, they need help from providers of Internet hardware and software to make the leap. Companies like Cisco Systems (Nasdaq: CSCO), Juniper Networks (Nasdaq: JNPR), and Foundry Networks (Nasdaq: FDRY) pave the road with routers, switches, and networking devices.
By now, it's well-known that one way to capitalize on a business trend is to bet on the companies that provide the infrastructure rather than those offering the services. That's the way to think of JNI.
Founded in 1993 as a division of Jaycor Inc., the company makes fibre channel hardware and software products that connect servers and data storage devices. It's all about speed on the Internet, and fibre channel equipment offers (in many cases) the fastest, most flexible way for companies to manage access to stored data.
Since it's so fast, fibre channel is expected to replace Small System Computer Interface (SSCI) as the transmission interface between servers and clustered storage devices, according to JNI.
The company's list of influential customers helps make the case: Amazon.com (Nasdaq: AMZN), Boeing (NYSE: BA), Charles Schwab (NYSE: SCH), and FDX Corp. (NYSE: FDX). The list goes on and on.
There's no shortage of forecasts predicting growth. Research firm International Data Corp. expects the market for products based on fibre channel technology will hit $15 billion by 2002, up from $2 billion in 1998.
Still, infrastructure companies struggle just like services companies when the products they make turn into commodities, become obsolete, or the market becomes saturated. Investors considering this industry should be genuinely interested in fibre channel, storage area networks, etc., in order to do the work required to understand the technology and JNI's place in the growing industry.
Pricing is clearly an issue in this industry. In its prospectus, JNI's management says, "The average selling prices of our new and existing products are likely to continue to decline in the future as we and our competitors introduce new and more technologically advanced products and as price-based competition intensifies."
That's the law of the jungle, but in an industry where pricing pressures are this extreme, investors are wise to align themselves with the sharpest management, one that's proven -- over time -- it can be the low-cost provider. On this score, it would make sense to give JNI some time to prove its mettle.
The company has strong momentum. Sales grew to $15.1 million in the first half of 1999 compared to $3.8 million last year. In addition, it turned a profit of $1.8 million, or $0.06 per diluted share, for the same period, and has no long-term debt.
On the other hand, JNI was cash flow negative for the first half of the year, mainly because of a run-up in accounts receivable and inventory. That's not unusual for a young company ramping up growth, but Fools like to see companies maintain positive cash flow since it's such a crucial measure of profitability. The company was cash flow positive in 1998, and investors should watch to see that it repeats the performance in 1999.
Of course, JNI isn't cheap. It shouldn't be if it's worth its salt. JNI trades at more than 30 times sales and at a P/E that tops 400. At these kinds of prices, investors should be sure they're getting a company bound to be a player in a major market, not a supplier in a niche industry.
Based on industry growth predictions, the market looks strong. The fibre channel industry is fragmented with players like Hewlett-Packard (NYSE: HWP), Interphase (Nasdaq: INPH), and QLogic (Nasdaq: QLGC) fighting to establish position.
With its momentum and fresh pile of cash, the company looks like it's in a good position to grab market share. But if it's a good company now, it will be a good company a year from now. In addition, investors will have had a year to examine the company as a publicly traded firm. It's one to watch closely.