First Union Initiates SAN Coverage

First Union Securities began coverage of six storage networking companies Tuesday, but found Veritas Software Corp. (Nasdaq: VRTS) the only one worthy of a Buy rating. The others the bank is now covering are Brocade Communications Systems Inc. (Nasdaq: BRCD), EMC Corp. (NYSE: EMC), McData Corp. (Nasdaq: MCDT), Network Appliance Inc. (Nasdaq: NTAP), and StorageNetworks Inc. (Nasdaq: STOR) -- each given a Market Outperform rating.

First Union analyst Andrea Gross says she has initiated coverage on these companies because they are all enabling the unstoppable trend” of moving storage off direct-attached systems and onto storage area networks.

This is being driven by the flood of information on the Internet, which all has to be stored somewhere, she points out. She also says the increasing availability and declining price of bandwidth make it easier to store data in a decentralized way.

Gross issued Veritas with a Buy rating because she believes managing these new and complex storage environments is an immediate concern for companies, one that Veritas is attempting to address.

For the others, Gross likes the long-term prospects but still has concerns about the short-term struggles each faces. She says EMC’s challenges include the IT spending crunch and the decreasing price of hardware; McData and Brocade are still waiting for the SAN market to really bite; and StorageNetworks, the only SSP in the bunch, has yet to prove its business model, she says.Out of all her picks, Gross is most wary of Network Appliance. “Its dominance of the NAS market is vulnerable to rapidly increasing competition." The Byte and Switch venture capital survey found 12 startups all chasing this space (see Venture Capital Survey).

“The overall growing demand for storage products and the high return on investment afforded by storage area networks is good news for all these companies,” says Gross.

The news seemed to please the market, as five out of six of the companies ended the day up against the previous day of trading. Network Appliance closed up 9% at 12.48; Brocade up 2.91% at 32.91; McData up 3.31% at 18.75; and StorageNetworks topped the lot, up 15.10% at 6.25. EMC was the only one that didn’t move, staying at $19.72.

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com

Movers and shakers from more than 100 companies – including Brocade and Network Appliance – will be speaking at StorageNet, Byte and Switch’s annual conference, being held in New York City, October 2-5, 2001. Check it outat StorageNet2001