Why A Bull Would Change Their Mind About QLogic

In a report published Friday, BMO Capital Markets analyst Keith Bachman downgraded the rating on

from Outperform to Market Perform, while reducing the price target from $12 to $10.50. Analyst Keith Bachman pointed out that the rating on QLogic had been upgraded in January 2015 on assumptions of a modest growth in the company's fiber channel business due to share gains and 33 percent growth in the Ethernet business in FY16 due to modest x86 server growth and customer conversions from 1GbE to 10 GbE. "We no longer believe that our assumptions are reasonable, or likely," Bachman added. Weak demand, excess inventory and weak conversion from 1GbE to 10GbE are expected to exert pressure on the company's performance in the future. QLogic's Ethernet revenues are expected to decline 26 percent to $79 million in FY16. The same are expected to increase 15 percent to $91 million in FY17. Fibre Channel revenue is expected to decline 6 percent in CY15, 9 percent in FY16 and 3 percent in FY17, the report mentioned. The EPS estimates for FY16 and FY17 have been reduced from $0.80 to $0.79 and from $0.90 to $0.80, respectively. In the report BMO Capital Markets noted, "[W]e have concerns that the growth of x86 servers will remain weak with enterprises and (more importantly) attach rates of 10GbE will continue to be slow to ramp."