isld...making noise after a slight rest yesterday from its huge run. Saw this article and vitually all have been mentioned on this thread of recent.
Individual Investor
Internet: Bear Stearns Lists the Best Internet
Infrastructure Stocks
Research Analyst: Bob Hirschfeld (06/21/00)
The rapid growth of Internet commerce is driving a buildout of Internet infrastructure, and
analysts believe that this exponential growth of network traffic implies a greater need for
bandwidth, improved security, and for ``everywhere - always on'' networks.
In a recent Bear Stearns publication titled ``E-volve,'' six Bear Stearns' technology analysts
surveyed the information technology landscape, pooling their efforts in order to present
clients with a broad range of infrastructure themes - along with the companies likely to
benefit.
Click here to see our list of 14 Internet Infrastructure stocks.
One theme is the ``last mile'' broadband connectivity provided by CLECs, or competitive local exchange carriers. CLECs
deploy fiber, DSL (Digital Subscriber Lines) and, in some cases, fixed wireless, thereby offering the high-speed,
high-bandwidth access technologies increasingly needed by both consumers and businesses.
According to analyst James Henry, the broadband buildout is developing very rapidly, noting that ``the promised land of
broadband will be reached in relatively short order -- perhaps over the next two or three years.''
Henry's top pick is Covad Communications (NASDAQ: COVD - news), which he rates a 'Buy,' and has set a target price of
$100 per share. Though Henry concedes that target ``may seem like a stretch from here, Covad is the ''premiere play among
broadband local players leveraging DSL technology, and its prospects are stronger than ever.``
Covad is currently trading around $17.75, well off its 52-week high of $66.67.
By year-end, the company should have a network presence that allows it to reach 45% of all homes and 50% of all U.S.
businesses, Henry predicts.
A second trend highlighted by Bear Stearns is the huge growth of Internet data, which creates the need for higher bandwidth
pipes. According to storage networking analyst Shaw Wu, today's bottlenecks are being overcome through fiber
channel-based storage area networks, layer 3 Ethernet switching, and optical-based metropolitan area networks.
Storage Area Networks, or SANs, according to Wu, offer storage service that provides ''backbone connectivity for pools of
servers.``
Says Wu, Brocade (NASDAQ: BRCD - news), is ''my favorite in the space. The company holds the leading position in fabric
switches and I've got a target price of $175 per share.``
Brocade's numerous partnerships with numerous metropolitan area network vendors, also make the company attractive,
according to Wu. Brocade is not a cheap stock, given that shares at $156 currently trade about 75 times expected year 2000
revenues.
Other beneficiaries of the SAN space include JNI (NASDAQ: JNIC - news), a leading provider of fiber channel adapter
cards, which Bear Stearns expects will grow its business sixfold over the next three years.
During its first quarter, JNI's revenues rose 190% to $18.5 million and EPS (earnings per share) climbed to $0.08, as
compared to no earnings one year ago. Backlog for the company's fiber channel switches was extremely high, as the backlog
rose to all-time highs and sequential sales ramped 24%.
In Layer 3 Ethernet switching (a faster way of switching which cuts down on overhead) Wu's favorite company is Extreme
Networks (NASDAQ: EXTR - news). Already the Ethernet leader in the enterprise space, Wu believes the company will enter
the carrier space and sell to service providers.
Another delivery system that Wu considers a trend are MANs, optical-based metropolitan area networks, that provide multiple
services, delivering data, voice Internet, and cable on a common platform, unlike WANs, or wide area networks.
In the MAN space, Bear Stearns likes, though doesn't officially recommend, Redback Networks (NASDAQ: RBAK - news).
The company is the leader in DSL/cable aggregation (worldwide leader in broadband subscriber management) and became a
leading participant in MAN through its $4.3 billion acquisition of Siara Systems earlier this year.
A third trend is de-bottlenecking. While most Internet bottlenecks could be solved through massive amounts of bandwidth,
effective ''permanent bandages are available, through caching and load balancing, according to infrastructure services analyst
Robert Fagin.
Fagin sees the bottleneck issue as one of 'clog,' with the burden of the clog increasingly shifting from end users to content
providers. The beneficiaries are companies that provide permanent bandage type solutions, like 3Com (NASDAQ: COMS -
news), which offers caching and load-balancing appliances.
Fagin also notes that, in general, backbone providers get paid for the traffic they carry in-network, not for facilitating the
process of shifting data from one backbone provider to another.
That provides an opportunity for companies that provide alternative pathways and avoid the bottlenecks. These include Akamai
(NASDAQ: AKAM - news) and Digital Island (NASDAQ: ISLD - news), content distribution networks that use steaming
media networks to rout data around existing choke points.
Yet another theme is Internet security, an issue that infrastructure analyst Bob Lam calls the ``Y2K problem of 2000.''
According to Lam, in business-to-business (B2B) e-commerce, Internet security spending is ramping rapidly, and will likely be
fed by the $2 billion in appropriations U.S. President Clinton has requested from Congress, an amount that is greater than last
year's total Internet security spending.
Lam's top pick is SonicWALL (NASDAQ: SNWL - news) the leading provider of Internet security applications for the small-
to mid-sized office market. Sonic Wall commands a 45% share in security DSL and cable connections, enjoys robust
distribution, and is the beneficiary of rapid growth in both DSL and cable modems. Competitors offer solutions that are from
three to 10 times as expensive, and Lam sees the company's opportunity as ``staggering.''
For the first quarter, SonicWALL's Internet security revenue rose to $13.4 million, up 496% from one year ago, and 54%
sequentially. EPS rose to $0.13 per share, well above last year's $0.01 per share.
Another infrastructure theme noted by Bear Stearns is the increasing demand for servers and complex storage. According to
Andy Neff, ``The major shift in computing will be everything on the Internet and everything always on.''
That means, says Neff, that servers and storage devices will enjoy tremendous demand. Companies especially well positioned
in that context that Neff favors include Sun (NASDAQ: SUNW - news) and EMC (NYSE: EMC - news) .
Another infrastructure theme involves the buildout of enterprise software. According to analyst Rich Scocozza, the key areas of
software buildout are: e-business software integration, storage, and application availability.
In e-business software integration, Scocozza notes that integrating applications ``can automate the business process from the
point where the order is taken through the point where the product is put on the truck.''
A leader in enterprise Internet integration is Tibco Software (NASDAQ: TIBX - news), which Scocozza describes as a
one-stop shop for e-business infrastructure software, and it enjoys a dominant position in technology and great mind share.
In addition, notes Scocozza, soaring amounts of corporate data require enhanced data storage, backup, and recovery. Veritas
Software (NASDAQ: VRTS - news), the market leader in high-end storage management, ``shines in this regard,'' he says.
Third, is availability. According to Scocozza, Web applications need to be 100% available, and BMC Software (NASDAQ:
BMCS - news) offers ``great software that really ensures the availability of these mission critical applications.''
Bear Stearns has been studying the effects of network traffic on infrastructure buildout and here is the ``E-volve'' infrastructure
list. It is adjusted to include companies that are not yet rated by Bear Stearns, though favorably cited by the company's
analysts. The list also excludes companies mentioned only in passing.
Click here to see our list of 14 Internet Infrastructure stocks.
For more in-house professional stock analysis and commentary, visit us at Individual Investor Online. |
