Cramer Gets 3Com Egregiously Wrong

We can respectfully argue as to whether 3Com will rise again as a meaningful contender in enterprise networking. My view is that 3Com won’t make the cut, but I respect the opposing positions others have taken.

Some of 3Com’s advocates point to its cash holdings, its low debt, its standing as a low-cost enterprise-networking alternative to Cisco, its global scope and potential to grow in developing markets (Eastern Europe, Latin America, Asia), and its relatively broad product portfolio.

Those are salient data points, and I think a plausible case can be made for 3Com. I disagree as to whether 3Com has the network-management and software smarts to stitch together and orchestrate its disparate point products into comprehensive solutions that can compete effectively against those from Cisco, HP, and Juniper. Still, I understand that others have a factual basis for saying that 3Com has decent product breadth and could, if the stars align just so, combine its TippingPoint intrusion-prevention systems (IPS) with its networking products to constitute something of an alternative to its bigger rivals.

Personally, I don’t think 3Com made the right choice in attempting to retarget itself at the high-end enterprise. In my view, it should have remained focused on small-to-medium enterprises (SMEs), where a relatively simple switch with a price advantage still can, as often as not, win the business. Even with Nortel’s enterprise-networking products, obtained through its acquisition of Bay Networks, scattering to the winds in recent years, solid enterprise competition for Cisco already exists in the form of HP and Juniper. At best, 3Com will serve as third or fourth banana.

Again, though, that’s an argument one can have with others respectfully, through different interpretations of the same sets of factual data.

What shouldn’t be countenanced, though, are blatant factual errors, especially those that easily could have been avoided by basic fact checking. Tub-thumping television stock hawker Jim Cramer made an egregious error last week when he mistakenly suggested that 3Com’s erstwhile joint venture with China-based Huawei remained not only intact, but that it was flourishing.

Here’s a summary of Cramer’s remarks on the subject, as excerpted from his blog at CNBC:

3COM has another force driving sales right now as well, China, where it’s been growing steadily since 2003. Remember, China committed $40 billion to build out its wireless infrastructure, and 3COM, through its joint venture with Huawei, will take advantage of that. The company already controls 32% of the Ethernet-switch market and 33% of the router market there. Cisco is bigger in the Middle Kingdom, but those numbers are still significantly higher than 3COM’s standing throughout the rest of the world: just 3%. And 3COM’s direct business in China accounts for 40% of total sales, and it’s growing.

H3C, as the joint venture is called, sells to larger enterprise clients than 3COM’s main business, which focuses on small to mid-sized companies. H3C’s branded products recently launched outside of China, and Cramer’s predicting that even a small bump in market share outside of the company’s geographical base “could be huge for 3COM’s earnings.”

That’s just wrong. 3Com’s joint venture with Huawei no longer exists. 3Com bought Huawei’s stake in the JV and kept the name. Huawei is pursuing an entirely course, with a different set of products. Increasingly, Huawei competes against, rather than cooperates with, 3Com.

That’s why Huawei’s contribution to 3Com’s revenues is shrinking. Effectively, after 3Com bought out the Chinese firm’s stake in the joint venture, Huawei became nothing more than a sales channel for 3Com. That sales channel is rapidly vaporizing.

Those changing dynamics explain why 3Com is aggressively trying to expand into other geographic markets. That’s also why the company is trying, yet again, to claim a leading role in enterprise networking. The dissolution of the 3Com-Huawei joint venture and the ensuing diminution of Huawei as a 3Com sales channel sales are fundamental keystones to understanding 3Com’s current predicament.

I am discouraged, though not surprised, that Cramer got it wrong so egregiously.

He could have averted the error with just a modicum of fact checking. If he had listened to 3Com’s analyst conference call, read the transcript of that call, or perused the company’s previous quarterly reports, he would have avoided the mistake. That he didn’t bother suggests that you should treat much of what he says with a mountain of salt.

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