When last I wrote on QLogic (NASDAQ:QLGC), I commented that it was a "good business at the right price, but only at the right price." Then the defenders of the faith sent me their protest emails. "You don't get it," or "You're so wrong," or "You're getting paid by a hedge fund to say that" were pretty typical. Since that piece was published on May 11, the stock has gone exactly nowhere -- down $0.34 per share -- while the broader market has gone up a bit.
Turning to the second-quarter results, it looks like QLogic is doing all right. Revenue from continuing operations was up 16% and the core storage area network (SAN) infrastructure revenue was up on the order of 21%. Although gross margins eased off a bit, operating margins improved on a year-over-year basis, and the company saw income from continuing operations up 20%.
Although the second quarter was fine, investors apparently didn't care much for the guidance on the next quarter. Though management offered guidance that was just a bit lower than the average at the time, the stock got smacked. Perhaps making matters a bit worse are concerns over the near-term impact of the company's decision to sell its hard-drive controller business to Marvell (NASDAQ:MRVL) for about $225 million.
Though this business was erratic and sometimes unpredictable, it had good margins and generated cash. The reaction is kind of funny in a way -- selling this business should make quarter-to-quarter results more predictable -- and analysts (and professional investors) hate surprises. Yet, some analysts are decrying the fact that this move will make the company less-diversified, even though playing in two different markets is something that doesn't often work well for many companies.
This turbulence aside, the stock is getting more interesting. Although the data storage market isn't as hot as it was a few years ago, I'd have to say that the general long-term outlook for storage demand is "more, please." What's more, QLogic has some excellent top-tier customers such as EMC (NYSE:EMC), IBM (NYSE:IBM), Cisco (NASDAQ:CSCO), and Hewlett-Packard (NYSE:HPQ) and, by and large, only has to share the space with one other company, Emulex (NYSE:ELX). Although QLogic certainly has to stay on its toes and stay at the edge of R&D, a duopoly can be a good thing because neither player is apt to want to kill the golden goose.
I'm not buying these shares now, or at the end of the 10-day blackout period I'm in for writing this, but they're getting more and more interesting. A 10% haircut from here and maybe I change my mind. This isn't a low-risk opportunity, but at the right price it could yet prove to be a lucrative one.
More logical takes:
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
