In the face of astronomical growth in bandwidth-hogging content, investors initially turned to companies that helped speedily transmit the data such Akamai (NASDAQ:AKAM) and Limelight Networks (NASDAQ:LLNW).
But traditional networks and data centers weren't meant to handle such huge influxes of data, and companies moved to virtualization, such as that brought by VMWare (NYSE:VMW), as the first step to expand capacity and then into the cloud to find the capabilities they require to meet the demand for robust speed and scalability. And the latest technological advance that could radically alter the landscape, once again, is called software-defined networking, or SDN. Some Foolish analysts think it's poised to be "the tech trend for the next decade."
I think Brocade Communications (NASDAQ:BRCD) has the opportunity to make great gains in the space, even if it isn't the biggest or doesn't have the first-mover status. Its talent is spread across many avenues of attack and that will allow it to reap large rewards. It has bets placed with a new Ethernet fabric that will create an intelligent base for cloud-optimized networking to give it greater leverage. Analysts at places like Gartner see "computing fabric" as the next stage in overcoming network problems caused by virtualization, but with SDN, it could be the next leap forward.
In an industry known for its buzzwords and catchphrases, SDN builds a programmable network that virtualizes the underlying hardware by adding a layer of software between the two. By doing so, a company can link its application to its network. It's attracting a lot of attention -- and money.
Oracle (NYSE:ORCL) purchased Xsigo systems to gain access to its Ethernet fabric and enhance its cloud capabilities, while VMWare scooped up Nicira for a cool $1.3 billion. Cisco (NASDAQ:CSCO), in a bid to stem the onslaught on its traditional turf, bought Cariden as part of a suite of companies it grabbed in November (Cloupia and Meraki rounded out its cloud-computing spree). And two weeks ago, Juniper Networks (NYSE:JNPR) bought Contrail Systems two days after it launched. That more than anything shows the importance the industry is placing on SDN.
Brocade views SDN as a paradigm shift that enables organizations to control their networks through applications, transforming the network into a platform for innovation. In addition, they can significantly increase the flexibility of the network's infrastructure in order to deliver new services faster and more easily.
Brocade is overhauling its entire portfolio, decoupling and opening up the data, control, and management planes across multiple product lines in order to deliver truly cloud-optimized networks. Its routers early on prioritized an early stage SDN communications protocol called OpenFlow, and it says its latest efforts have completely embraced the technology.
That kind of innovation in virtualized data centers, cloud computing, and software-defined networking helped Brocade beat Wall Street earnings expectations in the fourth quarter. It posted profits of $54 million, or $0.11 a share, compared to a loss of $4 million, or $0.01 a share, a year ago. After adjusting for one-time items, it earned $78 million, or $0.17, while revenue rose 5% to $578 million. Analysts had been anticipating profits of $0.14 a share. Management understands that networks must be cloud-optimized at every critical point.
A tempting morsel
It's also why it's a persistent target of takeover rumors. One notable risk is the change at the top that's coming to Brocade now that its CEO is stepping down. Investors (and possible buyers) may be wondering who will steer the ship, though a vacancy also clears the deck for someone to step in with their own personnel.
At just eight times earnings estimates, Brocade offers a compelling valuation compared to VMWare, EMC (NYSE:EMC), and Juniper, but puts it on level with beaten-down Cisco. I like its prospects whether as a stand-alone company or as part of someone else's stable, but let me know in the comments box below whether you agree the opportunity for Brocade is as broad as the vast network ecosystem.
Fool contributor Rich Duprey owns shares of Cisco Systems and Oracle. The Motley Fool owns shares of EMC, Oracle, and VMware. Motley Fool newsletter services recommend Cisco Systems and VMware. 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.