**More From Yahoo**
Fiber optics takes the
spotlight
By Vanessa Richardson
Redherring.com
September 3, 1999
Now it's official: fiber optics is white-hot. Cisco
Systems (Nasdaq: CSCO) announced last week it
was buying two privately held networking companies
that specialize in fiber-optic systems -- Cerent and
Monterey Systems -- for a combined $7.4 billion. The
$6.9 billion laid out for Cerent was the most ever paid
for a tech startup.
"Cisco put the seal of approval on
the fiber-optics industry and the
valuations that the individual
companies are getting," says
Kevin Slocum, analyst for the
SoundView Technology Group.
That particularly applies to the
component makers, companies
that sell the nuts and bolts -- or, in
this case, the lasers and multiplexors -- to companies
(like Cisco) that design the network systems, which
then in turn sell the systems to phone and data carriers
to install on their networks.
Last Thursday, the Cisco announcement sent the
prices of the three major component makers soaring.
They've since fallen a bit -- JDS Uniphase (Nasdaq:
JDSU), the No. 1 parts maker, closed Wednesday at
$110; smaller supplier SDL (Nasdaq: SDLI) closed at
$81.19; and E-Tek Dynamics (Nasdaq: ETEK), after
dropping lower, closed back up at $60.75 -- and offer
the opportunity to buy into the infrastructure.
Not that they're bargains at these
prices, though. Based on
estimated year 2000 earnings,
JDS Uniphase trades at a
price/earnings ratio of 100, E-Tek
at 96, and SDL at 75. Because of
that, some analysts have
downgraded their ratings from
Strong Buy to Buy or Hold since
the Cisco deal went through,
based on pricey valuations.
Other analysts and fund managers think the
nuts-and-bolts makers are still worth the price. "Lucent
[NYSE: LU], Nortel [NYSE: NT] -- all the system
suppliers get their basic equipment from just a handful
of companies," says SG Cowen Securities analyst Jim
Kedersha. "In short, they need these guys. They can't
go anywhere else."
THE CHOICE IS CLEAR
Fiber-optic technology has been around since the late
1980s, primarily in long-distance telephone system
backbones. It has become a hot item now for both
phone and corporate networks because of growing
demand for bigger bandwidth. And fiber has great
headroom. The laser light that carries data through
fiber-optic glass can be split into different colors, or
wavelengths, each of which carries a discrete data
channel. Better yet, transmission facilities for new
wavelengths can be retrofitted onto existing plants that
connect to fiber already in the ground, which makes it
the easiest way to increase bandwidth.
Wall Street estimates for annual growth in the use of
fiber optics settle around 30 to 40 percent. In its
acquisition announcement, Cisco estimates that the
market will hit $17 billion in 2002. Currently, fiber
optics is most widely used for long-haul
telecommunications (e.g., phone calls from Los
Angeles to New York) and for overseas cable laid
underwater, but it has found a new use in metropolitan
areas for cable TV and corporate intranets -- AT&T,
for example, is using fiber optics for cable
transmission.
For all these uses, component makers supply the
lasers, the chips, the amplifiers, and various other
gadgets needed to send the light skipping down the
wire. "If you buy into the fact that Moore's Law
applies to fiber optics and that demand is doubling
every six months, these companies are worth buying
into," says Philip Fine, a portfolio manager for Loomis
Sayles & Company, which holds JDS Uniphase and
SDL in its Aggressive Growth fund and private
investments. "Cisco is the best large-cap play on
infrastructure, but components stocks are another way
to profit from it."
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