NetStock! By Steve Harmon
e-harmon.com, Inc.
2000.03.15:
Light At The End Of The Market Pullback Tunnel?
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In certain European and Asian cultures it's polite to burp after a good
meal. Tech stocks finally burped.
For the past 6 months investing in tech was like a 7-course meal complete
with Napoleonic visits to the water closet.
The question now after the market dropped, is the burping session over or
just begun?
Last December we thought the market for Internet stocks was fairly frothy,
downright whip cream. We awaited a pullback. None came. Then January.
February. Up up and away in a bad Tom Jones song on endless playback. NASDAQ
5,000 in March. Then the drop finally came. One of them. We expect more.
We are fairly happy to see the market taking a breather these few sessions,
and it's fairly likely more will follow given the climate building up
towards the once again closely monitored Alan Greenspan moments. In many
ways, pullbacks are excellent opportunities to regroup and examine the
investment spectrum.
Especially what e-harmon considers to be a white-hot area. Light hot even.
That's because the future of data networking looks like a rainbow, data sent
as light.
Specifically, an area which we have placed favorable long term prospects
for, optical networking sector, took hits in the recent market correction
direction rampage. Some of the players optical networking slide:
COMPANY TICKER PRICE % DROP
NAME SYMBOL DROP MARCH 14
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JDS Uniphase (JDSU) -7 5/16 (-5.53%)
SDL Inc (SDLI) -16 15/16 (-8.36%)
Etek (ETEK) -21 7/8 (-7.94%)
Sycamore (SCMR) -7 45/64 (-5.13%)
Newport Corp (NEWP) -19.5 (-11.43%)
Corning (GLW) -6 1/16 (-3.28%)
Finisar (FNSR) -16 15/16 (-12.77%)
Digital Lightwave (DIGL) -11 5/8 (-9.39%)
Ciena (CIEN) -13 1/8 (-8.92%)
Avanex (AVNX) -31 11/16 (-12.34%)
During these down times it's critical to understand the opportunity ahead
for these companies. Perhaps there is already a next Cisco in the mix? It
does appear JDSU is on it's way, and has literally become a M&A machine in
the past year. The key comes if a company can create a monopoly in its
technology. Technology lock in.
In the optical networking space, though, there is a long way to go. The
photonic world is not yet built out by any means. Rainbow connections
haven't been made yet in other words.
Data will be traveling as light waves through the Internet, and with the
world screaming for more bandwidth- optics is the new foundation for the
global Internet.
However, the problem most vendors are facing here is the inability to scale
production and ramp up capacity. An few clear examples of this issue is the
buyout of ETEK & OCLI by JDSU and OPTX by GLW; JDSU hopes to leverage on
ETEK's packaging strength & OCLI's thin firm production, and GLW hopes to
enhance it's thin film filter manufacturing abilities with NetOptix's
expertise in the area.
At the same time there are companies in the group with highly questionable
valuations such as AVNX trading at a market value of $14bn with revenues of
$10.9mm for the 6 months ending Dec 31st 1999, and a $19.8mm loss in the
same period.
The current market value prices this MCI Worldcom-backed optical component
startup at a whopping 617.89x price to trailing 12-month sales (SDLI 67.84x,
CIEN 35.06x, SCMR 341.21x, JDSU 94.45x). It appears the market is pricing
in a hyper bullish view that AVNX will be producing stellar numbers in
comparison with some of the other optical players.
In this robust & bubbling sector, there will be some solid winners in the
next five years. Most if not all of these companies sport multi-billion
dollar valuations. It's likely we will see 50%+ rev & earnings growth (for
some), and we may need to continually value them with high premiums due to
the demand for their technology.
The 'lightband' web will be expensive, rapid and perhaps the ultimate killer
ingredient for a truly mainstream Internet -- mainstream being more than 15%
of the world's population using it within 5 to 7 years.
Rather than identifying one or two from this group a sector play may be a
favored approach on market pullbacks. Consolidation around platform
monopolies may occur here or the larger omnivores such as Cisco or Lucent
may realize that the light saber ought to be wielded by them.
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