The following is best viewed/read by accessing the URL since there are graphs to illustrate points in the article. It's a month or so old, but worthwhile reading.
www2.fiberopticsonline.com{F560F65C-2FEA-11D3-B647-00C04F481017}
Valuations on the Rise for Photonic Equipment Suppliers
6/28/99
In this month's installment, Fiber Optics Online Guest Editor William Magill
examines how the valuation of photonics stocks relate to Internet
expectations.
By William Magill, Banc of America Securities
Analysts consider Uniphase (San Jose, CA), E-Tek Dynamics (San Jose, CA),
JDS Fitel (Nepean, ON), Ciena (Linthicum, MD), and SDL (San Jose, CA) as the
purest investment plays on optical networking today. While trading in these
stocks has often been volatile, their valuations are commanding premiums over
the broader telecom equipment index. In some instances, these premiums are
being awarded despite inconsistent historic records. Investors in the optical
networking space appear to be looking in one direction only—ahead. The
following diagram compares the trading of these stocks as an index against
benchmark companies in telecom equipment, including Lucent (Murray Hill, NJ),
Nortel (Brampton, ON), Alcatel (Paris), Tellabs (Lisle, IL), and ADC
Telecommunications (Minneapolis). The subsequent table highlights the
disparities in valuations between the two groups.
Internet enablers
The products these companies make are complex and often difficult to
understand, even for the technology-savvy investor. Likewise, the determinants of
success and failure in this market can be hard to predict. For example, the
distinction between pump lasers from Uniphase and SDL can only be determined
by a lengthy evaluation of performance metrics, including output power (both out
of the chip and out of the fiber), signal-to-noise ratios, frequency stability, spectral
linewidth, life test data, and a host of other characteristics. Only the bravest of
investor would venture down this path. But the designation, "Internet enabler" is
easy to grasp. The market is quickly embracing the moniker, and these photonic
stocks are benefiting from just such a designation.
Are the photonics players Internet enablers? Yes, in the sense that expectations
of the Internet's greater potential will not be realized without them. We have all
heard the unprecedented record of growth being generated by Internet traffic. The
amount of data being dumped on the public network is tremendous and shows no
sign of slowing. Without photonics and its unlimited bandwidth potential as the
fundamental transmission technology, Internet performance will slow to a crawl
as subscriber growth increases unrestrained.
The following table shows the valuations of Internet stocks (Amazon, AOL,
Yahoo, Excite, and Infoseek) as an index. Their trading levels have no connection
to historic technology valuations, because no other new technology has promised
such rapid growth and long-term promise. Note that our photonics index pales in
comparison with these valuations, despite real sales and earnings from these
companies.
Derivative plays
Investors are hungry for investment opportunities in the optical networking space,
as evidenced by the valuations of our index of companies. This interest is
beginning to wash over derivative plays that participate in this market. Optical
Coating Laboratories (Santa Rosa, CA) and Corning (Corning, NY) are companies
that make optical components for WDM systems, but less than 50% of their
revenues currently come from this source. The following chart shows how the
prices of these stocks have increased over the past six months. Noticing the
impact to their valuations, these companies are all focusing product and
marketing efforts towards optical communications products.
Photonic equipment stocks will trade at a premium, as long as expectations are
met. Clearly the trend towards higher valuations is impacting the entire optical
networking group, and not limited to one or two individual stocks. The broad
nature of this affect suggests that it is market driven, and not company specific.
The valuation benefit photonics companies are receiving as Internet enablers is
both legitimate and sustainable, given their roles in this new market. I believe the
market for photonic networking products—both systems and components—will
remain vibrant through the next five years, as Internet-driven infrastructure
spending continues. And these companies will likely trade at premiums to the
larger telecom equipment sector as a result. |
