| Optical Correction : It has been a tough couple of weeks for most stocks in the once-hot optical sector. And while they are recovering some lost ground today, more tough times probably lie ahead. As our series on the Photonic Revolution has made clear, we are very much believers in the long-term prospects for the optical sector. But we have also cautioned that valuations are extreme due to the imbalance between supply and demand. That imbalance is slowly being addressed by a string of high-profile optical IPOs: Corvis (CORV), Avici (AVCI), Cosine (COSN), and Oplink (OPLK). Many more have now filed for IPOs, including Anda Networks, OMM, Luminent, Optical Comm Pdts, and Unisphere. Even without any other bad news in the optical sector, the increasing number of public companies competing for investors' dollars would be a problem for current valuations. But two other key issues also cause us to question current valuations. First, competition is intensifying at a dramatic clip. Venture capital money has abandoned the dot-com sector after over-investing there, and is now flooding the optical sector. We have been keeping a list of private companies competing in the optical sector and of the VC money they have received. We can add several companies and tens if not hundreds of millions a dollar each day to this list. It is simply staggering to see the amount of money being invested in the sector. The market opportunity is big, but it's not that big. As with the Internet sector, there will be more losers than winners. The second factor giving us pause is the increasing number of problems being experienced by telecom service providers. There are failures, such as iaxis, potential failures, such as ICG (ICGX), and companies whose stock prices are suffering, such as WCOM, T, and just about every other service provider. Service providers are the customers of the optical companies. Quite simply put, you cannot see your customers suffer without suffering yourself. This is not doomsday, as we still see strong growth in optical sales, but -- on the margin -- the prospects for the sector have dimmed just a bit. Because we see a bright future for optical, we will continue to research and write about the players. But we are in no hurry to recommend investments, as it seems very unlikely that these stocks will get away from you. The better strategy is to identify the strongest players and the price at which the valuation looks reasonable. Then wait for the market to bring that price to you -- it might well happen. - Greg Jones, Briefing.com |
