Shares of 3Com have risen appreciably this year on the strength of aggressive product rollouts, a few prominent customer wins, and the opportunity for some other vendor to wrest some of Cisco’s prodigious market share in enterprise networking.
On January 2, as the interactive chart at Yahoo Finance illustrates, you could buy a 3Com share for $2.38. As of June 9, 3Com shares hit a 2009 high point of $5.16 before retreating somewhat to close yesterday at $4.72. No matter how you slice it, 3Com shares have had a very good year so far.
Market analysts have begun paying attention to the company again. Today, for instance, we can see divergent interpretations of 3Com’s business prospects from Bernstein Research analyst Jeff Evenson and Needham analyst Greg Mesniaeff.
Mesniaeff is the optimist. He says:
“Like the legendary Woody Hayes, 3Com is moving forward with an all-out assault on the global enterprise networking market from its base in China, and it appears its take-no-prisoners approach is working.”
Given his emphatic assessment, it probably will not come as a surprise to learn that Mesniaeff has initiated 3Com coverage with a “buy” recommendation. He sets a price target of $7.
Meanwhile, Bernstein’s Jeff Evenson is heading in the other direction, cutting his rating on the stock to “market perform” from “outperform.” He has increased his price target to $5 from $4, which seems prudent given that shares are trading much closer to the later than the former.
Evenson concludes that 3Com’s shares are fairly valued. However, he also warns that 3Com’s sales to Huawei — its former partner in China-based H3C and a would-be, minority-share acquirer of 3Com itself — could decrease 30%-50% over the next year. In support of that forecast, he reports that Huawei is moving away from selling 3Com-H3C switches to its Chinese customers.
As Evenson suggests, 3Com must devise an effective strategy to compensate for revenue losses related to Huawei’s gradual estrangement from H3C as a supplier.
I think it’s a foregone conclusion that 3Com, through its H3C unit, will steadily lose business to Huawei and others in China. Without Huawei, 3Com will lose access to many valuable Chinese accounts. At the same time, Huawei is looking to build its own product portfolio instead of relying on 3Com, to which it no longer has a meaningful, long-term commitment.
3Com is trying to grow elsewhere, getting back into the enterprise-networking space against Cisco in North America, EMEA, and other global markets. The challenge for 3Com is its past — it has abandoned the enterprise space before, and customers who were burned by the experience are not inclined to leap into the flames again — and the present.
With regard to the here and now, 3Com is not alone in having pretensions to enterprise-networking glory. Other contenders looking to take away market share from Cisco include HP (ProCurve), Juniper, and the bankrupt Nortel Networks, with smaller players also looking to get a piece of the action.
3Com, despite some effective PR in the past few months, has quite a hill to climb global enterprise networking, which is where it must continually gain ground if it is to meet the lofty expectations that Needham analyst Greg Mesniaeff has set for it.
With date-center virtualization taking hold — and Cisco and HP strongly positioning themselves as one-stop shops for servers, storage, and networking gear — 3Com might find itself at a competitive disadvantage in many large accounts. 3Com has a relatively extensive line of networking products, but it doesn’t have enterprise servers or storage.
I’m skeptical of 3Com’s ability to take on Cisco and HP. It might gain some share if it is determined and perseveres in restoring its tarnished image as an enterprise-networking purveyor in North America and Europe, but I think the gains will be limited by 3Com’s stature and sales channels.
The wild card in this picture is IBM, which sells servers and storage, but doesn’t have a horse in the networking race. 3Com tried to sell itself before, and it’s not unreasonable to think it could be on the block again. If IBM is shopping for a networking vendor with an extensive product portfolio, 3Com definitely could be an acquisition candidate.
Then again, IBM is getting closer to Juniper, which could leave 3Com with no place at the market-consolidation table when the music eventually stops.
Twilight in the Valley of the Nerds 