Internet: The Best Broadband Plays You've Never
Heard Of
Eliot Walsh (8/9/99)
By now, most investors have come to accept that broadband will
be the next wave of the Internet.
We've been covering the battle for bandwidth between America
Online (NYSE:AOL - news) and Excite@Home
(NASDAQ:ATHM - news) extensively, but what about the other,
lower-profile players in the high-speed race?
Looking to find the best way to play the broadband blitz, we
called CE Unterberg Towbin analyst Seth Spalding, a specialist in
tech stocks.
Spalding's track record is highlighted by his February 17, 1999 recommendation of JDS Uniphase
(NASDAQ:JDSU - news) , a fiber-optics company, at $41.19. That stock is now at $83.50. And
in late March, he recommended Antec (NASDAQ:ANTC - news) , a manufacturer of the hybrid
coaxial/ fiber cable used in cable broadband solutions. He made the call when the stock was at
$25.25. It's now at $39.
Spalding's Picks
What are his next hot picks for the broadband juggernaut? 'I think right now there are two places to
look,' he says. 'Infrastructure and wireless, which is an interesting niche solution.' For the first
category, he picks Harmonic (NASDAQ:HLIT - news) , while his wireless play of choice is
Adaptive Broadband (NASDAQ:ADAP - news) .
Harmonic
Harmonic designs and makes digital fiber optic systems, including optical transport solutions -
primarily devices that provide a 'return path' in hybrid fiber optic/coax cable lines. This technology
enables information to flow in two directions over cable lines (e.g. both to and from a consumer's
PC).
'Other, bigger infrastructure companies, like Antec and Scientific-Atlanta (NYSE:SFA - news) are
less compelling investments,' says Spalding, citing Harmonic's greater upside potential. 'The outlook
continues to be positive for domestic cable infrastructure spending, with international showing signs
of life,' the analyst wrote in a recent report.
'AT&T contributed 40% of revenue in the quarter, but visibility in this account remains excellent.
Several marquee accounts other than AT&T were significant customers in the quarter, including
RCN, Cox, Charter, and Time Warner (NYSE:TWX - news) ' Spalding wrote.
Spalding recently raised his rating on Harmonic from 'buy' to 'strong buy,' and upped his 1999
earnings per share (EPS) estimate to $0.83 from $0.54, and his 2000 EPS estimate to $1.20 from
$0.86.
Citing positive infrastructure spending trends going forward, and Harmonic's technology's 'setting the
standard for the next generation of cable networks,' he insists that 'Harmonic's combination of
optical networking and digital video expertise make them the force to reckon with in the
Hybrid-Fiber/Coax infrastructure market.'
Adaptive Broadband
Adaptive Broadband (NASDAQ:ADAP - news) , Spalding's second pick, focuses on the
broadband wireless market. The $331 million company designs and sells satellite and wireless
communications systems and products. It currently has three core units fully up and running: 1)
satellite, 2) broadcast television, and 3) data telemetry, which account for 50%, 25%, and 25% of
revenue, respectively.
Spalding is impressed by four imminent new product roll-outs, which include a two-way microwave
radio product called AB Access, especially useful in providing wireless high-speed access to small
businesses or communities where xDSL and cable will not be available. Spalding forsees $30 million
to $35 million in AB Access sales for fiscal 2000, once the product starts shipping large orders in
late fall.
Also coming out is a Satellite Internet Protocol product called SpectraCast, which will provide
broadband wireless Internet access via satellite. Finally, two related video transport innovations are
being readied for market. The Twin Stream fixed wireless product will be able to transmit 45Mbps
worth of streaming analog or digital video from a fixed location, while the Code Runner will perform
the same task from a mobile platform.
With the advent of digital television broadcast around the corner, Spalding sees huge potential for a
mobile wireless device that can beam digital video from remote locations to, for example, the TV
studio. He believes the latter two units will command margins of about 40% compared with current
margins of about 33%.
Adaptive's customer base includes AT&T (NYSE:T - news) , British Telecom (NYSE:BTY -
news) and MCI WorldCom (NASDAQ:WCOM - news) , among others. Interestingly,
MCIWorldCom and Sprint (NYSE:FON - news) have been on a MMDS (Multipoint
Multi-channel Distribution Service) spectrum-buying spree, which Spalding feels 'indicates that these
long-distance providers are planning to use wireless as a solution for last-mile access.'
For the nine month period ended March 31, 1999, Adaptive's net sales fell 10%, to 116.5 million,
while the company had a net loss from continuing operations totaling $23 million versus $3.5 million
in income. $11.8 million in purchased research and development (R&D) charges hurt the bottom
line, but the company recently spun off its low-growth Government division to Northrop Grumman
for $93 million in cash, and has inked a full-scale manufacturing deal with behemoth Solectron
(NYSE:SLR - news) , which 'further validates the market, as Solectron performs extensive due
diligence before signing on a new customer,' writes Spalding.
The analyst sees trends toward local loop bypass via broadband wireless and a federal mandate for
High-Definition Television (HDTV) driving estimated fiscal 2000 revenue of $224.6 million. The
company has no debt and has $3.18 per share in cash.
'We believe that Adaptive Broadband represents a solid turnaround story,' concludes Spalding. 'Its
line up of new products combined with the market phenomenon of MMDS license consolidation
and mandated HDTV broadcasting place several strong growth opportunities ahead of the
company. Its focused management team and strengthened balance sheet give it the ability to
execute.' The analyst maintains a 'Strong Buy' rating with a 12-month price target of $40. The stock
closed Friday at $22.38.
When pressed for a call on broadband content plays, Spalding said that while he does not follow
the company, he favors Macromedia (NASDAQ:MACR - news) , 'the leaders in providing
interactive software for the Internet.' The company's core product is the fun Shockwave program
found on many interactive websites.
Bottom Line:
Most investors perceive that the Internet's need for speed will drive the next wave in the sector's
development. Companies such as Harmonic and Adaptive Broadband represent the engines and
conduits that will enable that speed to happen, and both are poised to be primary beneficiaries of
the developing broadband market. |
