Is government technology spending staying tight all year, or is Uncle Sam opening his wallet already?
The answer to that question will determine how many of the largest tech businesses will perform in 2011. And your conclusions will vary, depending on who you choose to listen to.
In last week's earnings report, networking giant Cisco Systems (Nasdaq: CSCO) took the gloomy side of the argument, telling analysts that "the challenges at a state, local and eventually federal level in our opinion will worsen over the next several quarters."
Last night, storage networker Brocade Communications Systems (Nasdaq: BRCD) went the other way.
Management told analysts that both the Department of Defense and intelligence arms of government had "a healthy pipeline of opportunities" in the works. Brocade is waiting for a signature on an appropriations bill that should help results in the second quarter and the rest of the year.
Granted, this could be some special project that Cisco wasn't invited to. But that sounds unlikely given the way Cisco equipment tends to find a way into most large networking contracts. What we have here are two conflicting views on government IT spending.
Cisco's greater scale should give the company a better vantage point for reading the tea leaves, which makes me think that Brocade is being overly optimistic here. The company beat first-quarter expectations by 20% on the bottom line and by next to nothing in terms of revenue, which wouldn't merit the brief 14% jump the stock made in early trading today. Brocade is being evaluated on the basis of a strong next-quarter forecast, which in turn relies on this rosy view of federal spending patterns.
I'm not buying it because I think Brocade is jumping to naively optimistic conclusions. The stock is also expensive when compared with other networking specialists not named Alcatel-Lucent (NYSE: ALU) or Juniper Networks (Nasdaq: JNPR) -- if you want a high-quality networking stock, you'd be better off with large cap Cisco or small cap QLogic (Nasdaq: QLGC) today.
On the other hand, analysts are falling all over themselves to raise estimates and issue new "buy" rating on Brocade. Baloney. The stock has been nice to my all-star CAPS portfolio over the past six months, but I'm ending that pick today because I don't think the current price is supported by the evidence at hand. Brocade could use a few bears right now.
That's my two cents. Learn more about Brocade by adding the stock to your Foolish watchlist.
