3Com stock falls

3Com stock was down over 15% yesterday. The drop is attributed to analysts' interpetation of comments made by Cisco Systems following its second quarter earnings, and on a lackluster quarter by distributor Tech Data.

3Com fell 6.75 to 37.38 after Cisco executives stated that its gross margins are down due in part to aggressive pricing in LAN switches to enterprise customers. This, combined with Cisco's increasing share of the low-end LAN market, which is 3Com's bread and butter, helped trigger a run on 3Com stock.

Another factor was word from 3Com distributor Tech Data that its fiscal fourth quarter earnings would fall short of Wall Street estimates. Wall Street surmised that sales of 3Com gear, or lack thereof, might have contributed to Tech Data's disappointing quarter.

A third factor was speculation that continued pricing pressure on adapter cards, which account for about 20% of 3Com's business, would pinch margins as well

Some analysts, though, aren't buying it.

"3Com reported a real good November quarter. At that time, they also gave very clear guidance that the fiscal third quarter would more likely than not be flat to possibly down revenue-wise, (with) probably somewhat lower gross margins," Andy Schopick of Nutmeg Securities says. "And now all of the sudden people are putting spins on adapter pricing, Cisco said enterprise is slowing. The reality is that 3Com's going to have a sequentially down quarter."

"People are just freaking out over a bunch of things," Scott Heritage of Warburg Dillon Read says. "Enterprise spending is potentially a threat but that's not something that's cropped up all of the sudden. I don't think Tech Data said anything about data networking but people may just be relating the two together. We've seen normal price declines in adapter cards. If you look at 3Com's whole product family, the whole company is exposed to price declines."

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