June 01, 2000 06:01
Personal Capital: Big eyes for smart pipes
Tuesday's relief rally in the technology sector had some important signals for the coming months. One
signal: It won't be as easy to make money as it was in the past. Two: When the dog days of summer
finally end, any rally will be highly selective and will focus on the strongest of players in the most healthy
sectors.
Of all the stocks that showed signs of life this week, the next-generation networking stocks -- such as
Redback Networks (Nasdaq: RBAK), Juniper Networks (Nasdaq: JNPR), Sycamore Networks (Nasdaq:
SCMR), and Ciena (Nasdaq: CIEN) -- seemed to be among the strongest. Likewise, optical components
specialists such as E-Tek (Nasdaq: ETEK) and JDS Uniphase (Nasdaq: JDSU) showed similar
strength.The networking stocks' rally shows that investors have not finished speculating in the bandwidth
blowout. Telecom companies are still fueling a massive buildout in networking equipment, fiber optics,
and software to manage the flow of data, voice, and video over these emerging networks. The potential
upside is too great to ignore."The telecom and cable equipment players are going to be the first to
rebound," says Alan Bezoza, analyst with CIBC World Markets (NYSE: BCM). "The telecom operators
are still spending significantly to upgrade their networks -- so these are real companies, not dot-co!
mmers."Some of Mr. Bezoza's pick
s are the optical components players, including Harmonic (Nasdaq: HLIT), C-COR.net (Nasdaq: CCBL),
JDS Uniphase, and SDL (Nasdaq: SDLI).On the equipment side, communications suppliers have entered
a bidding war to acquire the hottest new optical networking companies. This week, Lucent Technologies
(NYSE: LU)'s $4.5 billion purchase of Chromatis Networks was just another in a series of
multibillion-dollar acquisitions -- some of which resulted in little or no revenues for the acquiring
company.CONNECT THE BOXESMany of these acquisitions have, in fact, been failures. The successful
next-generation networking players will be the ones that can integrate companies into their product
portfolio and build the software to connect the boxes."It's intelligence and how they integrate the
software," says Gina Sockolow, analyst with Brean Murray. She says the current buying spree means
nothing if the acquirers fail to integrate the products into their software strategy. Some botched acquisi!
tions have already proven p!
ainful for some companies. Lucent's $900 million payout last year for Nexabit Networks, which marketed
a complex routing product that for all intents and purposes is still sitting on the lab floor, now looks
somewhat foolish. On the other hand, Cisco (Nasdaq: CSCO)'s purchase of Cerent -- made last year at a
price of $6 billion -- has proven prescient. The acquisition is already set to generate up to $1 billion in
additional revenue on Cisco's books this year, and it is now the anchor in Cisco's optical networking
strategy.Up-and-coming companies might want to take a closer look at Cisco's perfected acquisition
game, which includes examining the technology and then quickly folding it into its existing technology
framework and sales force."Cisco has a whole team that goes in and examines the technology and
makes sure it's right, and somebody like Lucent doesn't have that," says Ms. Sockolow.AN EDGE WITH
LEGS?Emerging next-generation networking players such as Redback Networks a!
nd Juniper Networks have an open
ing in the optical space -- specifically the area known as metropolitan area networks (MANs) -- to make
their move. The first vendor to integrate the emerging "edge" optical equipment across a common
software switching and routing platform will be in a powerful position.Redback has shown early success
in integrating Siara, the company it got last year for $4.3 billion. This week, Redback announced a
metropolitan-area networking product, the SmartEdge 800, that is based on application-specific
integrated circuits (ASICs) built by the Siara engineering crew. The product appears to have legs.The
early Siara success has made Redback one of the new favorites on Wall Street. For example, Ms.
Sockolow continues to rate it as a buy, saying, "It has as much upside as Juniper at half the valuation."A
TIARA FOR SIARASteve Levy, an analyst at Lehman Brothers (NYSE: LEH), was also impressed with
Redback's Siara story. "The announcement of the first release of the Siara product cements our !
view on the positive nature!
of the Siara merger," wrote Mr. Levy in a research note. "We believe this should also allay any concerns
over the successful delivery of the fully featured Siara product or its important ASIC component."Mr. Levy
has upped his Redback revenue forecasts as a result of the development of the new product line. He
sees it contributing $15 million in revenues to the second half of 2000, as well as $120 million to the 2001
forecast. Mr. Levy expects $190.9 million of total revenue in 2000 and $440.2 million in 2001, with
earnings per share of $0.46 predicted for 2001. He has reiterated a buy rating with a $160 price target for
year-end.That's the power of a successful acquisition and what it can do to your share price: Redback
shares are up 13 percent since last Friday. The growing importance of M & A now puts pressure on
companies such as Juniper Networks and Sycamore, both of which have valuations in excess of $20
billion but still need to make significant acquisitions to keep pac!
e with the kind of growth that i
nvestors are demanding.
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