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Morgan Stanley Report Pounds Stocks

Light Reading
News Analysis
Light Reading
8/20/2001

Ethernet switching companies, Extreme Networks Inc. (Nasdaq: EXTR) and Enterasys Networks Inc. (NYSE: ETS), formerly Cabletron, watched their share prices tumble after Morgan Stanley Dean Witter & Co. analyst Christopher Stix issued two separate notes downgrading both stocks.

Stix downgraded Extreme and Enterasys to Neutral from Outperform. Extreme’s stock finished the day at $16.50 a share, down 5.95 (26.50%), and Enterasys finished at 9.19, down 3.86 (29.58%).

“Stix has a lot of respect in the industry,” says one analyst who didn’t want his name used. “He can move a stock up or down just by sneezing.”

In both reports issued today he cited overall weakness in the Layer 3 switching area with increased pricing pressure from competitor Cisco Systems Inc. (Nasdaq: CSCO).

“We believe that pricing could be an issue over the next year, likely driven by an attempt by Cisco to gain market share,” writes Stix in his report on Extreme.

Citing market research from the Dell'Oro Group, Stix said that combined Layer 2 and Layer 3 switch prices have declined an average of 23 percent annually since 1994. (Layer 2 10/100-Mbit/s switch port prices alone declined 30 percent annually). Based on historical data, Stix contends that growth rate forecasts for the Layer 3 switch business have been overstated by 10 points or more and that reasonable growth for Layer 3 switching should be in percentages in the high-teens to mid-twenties. Factoring in Cisco’s aggressive pricing, he expects growth rates to fall to the mid to upper teens.

Stix lists several key factors that indicate Cisco is about to launch a pricing war. He says that a recent channel check suggests that at one large distributor about 65 percent of Cisco’s major LAN deals are being done on “special” pricing. Also, he expects Cisco to try to increase its 38 percent market share in Layer 3 switching, which is expected to generate $4 billion in 2001, according to Dell'Oro. What’s more, Cisco’s Layer 3, 100-Mbit/s ports are priced about 60 percent above the competition, says the report. If it cuts its prices by 30 to 35 percent, it would put pressure on the businesses of Enterasys, Extreme, and Foundry Networks Inc. (Nasdaq: FDRY).

Stix believes Extreme will end its quarter on target, with the company still expected to hit his target of $0.02 EPS and $116.0 million in sales for fiscal Q1 2002. He also maintains his fiscal 2002 estimate of $0.18 a share but is cutting his revenue forecast to $518.8 from $540.1 million.

“We would emphasize that our cautious stance on Extreme is purely a macro call on the long term Layer 3 switching growth rate,” he writes.

But in his note on Enterasys he warns that the company, which is exclusively focused on switching sales to enterprises, has seen inventory buildups increase to 19 weeks. Even though Stix expects Enterasys to meet or exceed its expectations this quarter, as it works to push out inventory through aggressive pricing, he believes that this could lead to problems further down the road.

“We recognize that we just recently initiated with an Outperform-V rating on August 15, 2001,” he writes. “However, this new channel information gathered over the past several days has caused us to get more cautious on the stock.”

Other Layer 3 networking stocks were also affected (see Riverstone Upstaged by Downgrades). Riverstone Networks Inc. (Nasdaq: RSTN) closed at 11.30 down 1.01 (8.20%), Foundry ended at 14.30, down 0.96 (6.29%), while Cisco actually ended on a positive note. Its final price was 16.90, up 0.29 (1.75%).

- Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

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lighthearted
lighthearted
12/4/2012 | 7:56:10 PM
re: Morgan Stanley Report Pounds Stocks
extr has always been forthcoming about price declines in the market, but stix obviously felt the need to get his name in the press. this call is based upon stix' hunch and is a further disgrace on the sell-side. wouldn't it be great if he, meeker, and blodget can share a room in jail when the sec finally cracks down on this thinly veiled manipulation...
hisles
hisles
12/4/2012 | 7:56:07 PM
re: Morgan Stanley Report Pounds Stocks
Seriously...the analysts have proven again and again to be absolutely clueless in understanding the dynamics of the networking space..

Simple..
Long Haul DWDM is dead in short to medium-overcapacity and sewn up many times by incumbent vendors

Metro DWDM is overated in Short term for new entrants -have to build metro ethernet VPN/Broadband Access story first

Metro Ethernet plays with Strong focus in PTT's with strong partnerships where aren't just a box will kick Cisco into oblivion...

If Cisco can't buy the business they are screwed because the combination of next gen deterministic hardware based solution like Juniper-Extreme combinations deliver new revenue generating services-best effort is dead for the big boys.

When new entrant Metro plays announce large REAL PTT wins that is when the revenue rolls...

And watch for a couple in the ethernet space because I am very close to it.....


ipcore
ipcore
12/4/2012 | 7:56:05 PM
re: Morgan Stanley Report Pounds Stocks
"Seriously...the analysts have proven again and again to be absolutely clueless in understanding the dynamics of the networking space.."

AMEN!!! Well said!!!
lighthearted
lighthearted
12/4/2012 | 7:56:03 PM
re: Morgan Stanley Report Pounds Stocks
chambers must be happy that basically stix is calling him a liar: chambers said that he will not resort to a price war in the conference call. this doesn't mean that they won't institute aggressive pricing eventually, but should stix publish his own "guess?" moreover, hasn't cisco always been aggressive? how much margin erosion will the street accept after csco finally produced a somewhat stable and reasonable quarter?

lastly, if cisco gets cutthroat in layer 3 pricing, don't they risk cannibalizing their layer 2 business?

what a stupid call - why doesn't he just go on vacation with all of his other wall street cronies...
lighthearted
lighthearted
12/4/2012 | 7:56:02 PM
re: Morgan Stanley Report Pounds Stocks
chambers must be happy that basically stix is calling him a liar: chambers said that he will not resort to a price war in the conference call. this doesn't mean that they won't institute aggressive pricing eventually, but should stix publish his own "guess?" moreover, hasn't cisco always been aggressive? how much margin erosion will the street accept after csco finally produced a somewhat stable and reasonable quarter?

lastly, if cisco gets cutthroat in layer 3 pricing, don't they risk cannibalizing their layer 2 business?

what a stupid call - why doesn't he just go on vacation with all of his other wall street cronies...
getalight2001
getalight2001
12/4/2012 | 7:55:58 PM
re: Morgan Stanley Report Pounds Stocks
Last year, I remember seeing Stix on CNBC issuing a 'strong buy' recommendation on Cisco right after the stock hit its all-time high in the mid-80s.

He said, and I remember the quote, "I don't think there is any price at which this stock is too expensive."

Can we, should we, trust and believe this guy?
lighthearted
lighthearted
12/4/2012 | 7:55:57 PM
re: Morgan Stanley Report Pounds Stocks
you left out the best part - in the Fall of 2000 (or somewhere around there), he again issued a strong buy on csco, only to drastically reduce targets about 10 days later. by the way, i am sure that the banking side of the house loves this guy - he must be really setting them up to take part in the coming consolidation.
jrhamp
jrhamp
12/4/2012 | 7:55:46 PM
re: Morgan Stanley Report Pounds Stocks
It was thrown out today by a Federal judge. The suit alleges Mary Meeker of MS misrepresented certain issues with stocks the company IPO'd and held. I cannot understand how markets can be moved by people like Meeker, Blogett and other who have absolutely no credibily..Perhaps the upgrade/downgrade remarks from CNBC and other impact the average trader.but, the average trader is not trading...and who would..the larger firms are churing shares at little or no commission for 05 cent plus moves to generate and justify their market marker companies. Like most of you, I hope the SEC mandates issues like ML voluntarily did reference holding stocks which ana have equity interest....
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