Merrill Initiates Brocade Communications with 'Sell'

Analyst Shebly Seyrafi sees competition ahead, and says pricing remains the key to profitability for data-storage makers

Merrill Lynch initiated Brocade Communications (BRCD ) with sell. Also, Merrill resumed coverage of Network Appliance (NTAP ), Veritas Software (VRTS ), QLogic (QLGC ), McData (MCDTA ), and Storage Technology (STK ) at neutral.

Analyst Shebly Seyrafi says the data-storage market is still in the early stage of its migration from direct-attached storage to networked storage. He notes companies riding the migration to networked storage should grow well in units, but he says pricing curves will be the key to profitability. Seyrafi says the storage area networks (SAN) switch space (Brocade, McData, Cisco Systems, and Computer Network Technology) has too many risks near-term; he thinks McData has the best near-term prospects.

Also, Seyrafi says the risks for the SAN switch market include pricing, uncertainty about Cisco's entry, and the validation of intelligent switches. He rates Brocade as sell due to valuation, competition, and the need to validate intelligent switches in the marketplace.

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