Jim, I side with Steve. Here are my thoughts. First the facts:
- The company is indeed at the forefront of the telecommunication technology. However, there will be
very fierce competition from much bigger players including LU, Northern Telecom etc.
- CIEN is a young (and therefore inexperienced) company. Founded in 1992 by two physicists.
- The new technology to be deployed by LU will quickly make CIEN's products obsolete, or at least CIEN
will be playing catchup.
- CIEN relies on LU, among other competitors, for components to manufacture its own product.
- The sole company product is the Multiwave 1600 (TM) systems which began shippment last Q. Last year,
the company generated zero revenues.
- Last Q revenue was about $50 M, derived almost in its entirety from a single customer, Sprint. CIEN earned
0.13 in the quarter.
- CIEN has about 100 million common shares equivalent, giving it a market cap of close to $3 billion.
- Much of the common shares equivalent (73 M shares) will be converted to common stocks after the
expiration of the lock-up period (180 days). These shares are owned by the venture capitalists.
- CIEN has 301 employees as of 1/31/97, an increase of 76 people from the prior quarter. The equivalent
market cap/employee is a whopping 10 M, even MSFT doesn't come close.
- CIEN is in several litigation proceedings, being sued by Pirelli for patents infringement.
Now, my opinions:
- CIEN's reliance on a single customer makes it extremely vulnerable to revenue fluctuations and price
concession, not to mention assurance for continuing operation.
- Because similar and/or better technology is being developed by its competitors, a buyout of the company is
unlikely. Beside, who wants to pay $3 billion for an unproven company whose technology is at risk of
infringing others' patents and may quickly become obsolete.
- The venture capitalists will cash out when they are allowed to. Even at a fraction of today's price, they will
still do very well with respect to initial investment. I have seen this happened over and over. Xylan is one such
example.
- The analysts' projected EPS this year is 0.66, giving it a forward PE of 43 while revenue is projected to
grow at less than 30%.
- A miss of the EPS can easily halve its value overnight.
- Liquidation by the venture capitalists will at least halve its current value. And that, in my opinion, will
happen. However, we'll need to wait until August.
- Being a high tech company in a hot field, the company's spending on R&D is a low 5.7% of rev last Q.
Although increased R&D spending is planned, it takes time to ramp up this area.
Bottom line: I think this company is very very overvalued. It doesn't deserve a market cap of 1 B, let alone 3
B. The stock will likely drop as a function of time with big drops to occur in the Fall of 97.
My target: on 12/31/97, CIEN will be traded at 5-10/share.
Regards,
Tom |
