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Radware Ltd. (RDWR) Message Board

  • iaccount100 iaccount100 Mar 28, 2011 2:41 PM Flag

    Nervousness in Cloud

    This is from the RVBD Message Board

    Here is some information about the sector from March 9 and thereafter we have recommended avoiding the Cloud/Network Equipment leaders (if you haven't had a chance to read these comments, we've reprinted them in the March 14 and March 21 reports, under various headers such as "FNSR"/"Optical"/"RVBD & APKT," etc). In short, the rotation we've been seeing out of Tech can be attributed to concerns that the sudden inventory build-ups and weak demand that first appeared in the Optical space could be a harbinger of things to come in the wider "Broadband Build-out" plays, most of whom still look very extended and generally trade at very rich multiples. (These concerns have been amplified by the possible supply/demand disruptions wrought by the earthquake and tsunami that hit Japan.)

    Over the past few sessions, former EG component FFIV, who was the first in the group to issue surprisingly weak guidance on January 19, is trading as though investors expect another round of disappointing guidance from that company. In this context, it is not surprising that RVBD is now showing signs of distribution, as is APKT to a lesser extent. Even though RVBD and APKT are arguably two of the highest quality growth stories in Tech, it's a fair bet that some portfolio managers are reassessing whether they want to hold full positions in these names as we enter "preannouncement season".

    So that's an explanation for the nervousness surrounding the leading Broadband/Cloud plays. So what happens from here? We have a recent precedent for this: the surpringly weak quarter from FFIV that blindsided Technology investors on January 19. At that time, FFIV cited a period of strangely weak demand in November, which they really couldn't explain to the Street. Naturally, fears of a slowdown at the time took down related leaders such as RVBD and APKT. It was only when RVBD and APKT reported their own typically-strong numbers and issued bullish guidance that the Street could again become comfortable enough to bid those two stocks up again to new highs.

    This time, the same rules apply: as we said on March 17, given their extremely rich multiples it will be difficult to feel comfortable holding even the highest quality leaders such as RVBD and APKT until they can convincingly explain to investors that they are not seeing the same pressures that have begun to disrupt business in the optical industry. Some reaffirms would do the trick (of course, raised guidance would be even better). The difference now though is that in January FFIV's warning could ultimately be explained away as a company-specific issue, while today there will be a bit more skepticism because we've now heard a series of companies warn and describe the same problems.

    Even though the current crop of warnings have been confined to the optical industry, and it's certainly possible that the best-run companies will be able to side-step or grow regardless of these pressures, right now this is creating quite a headwind for all of the major Cloud/Broadband plays (RVBD, APKT, CRM, CTXS, VMW, JNPR, RDWR, SVVS, RAX, etc).

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