MORGAN STANLEY DEAN WITTER
Outperform
Avanex (AVNX) Alkesh Shah/David Jackson (New York) – Oct. 25, 2000
52–Wk Shs Out EPS EPS EPS 5-Yr Est.
Price Rng Div Yld (MM) 2000A 2001E P/E 2002E P/E Growth
$119 $274–47 -- -- 54.8 $(0.30) $0.25 NM $0.37 NM 50%
Target Price: $175 Market Cap: $6.5B
Fiscal year ends June 30. NM = not meaningful.
Company Description
Avanex designs, manufactures, and markets fiber-optic-based
products, known as photonic processors, which are
designed to increase the performance of optical networks.
They offer communications service providers and optical
systems manufacturers greater levels of performance and
miniaturization, reduced complexity, and increased cost-effectiveness
as compared to current alternatives.
Valuation
We rate AVNX Outperform with a $175 target price, or just
under 30 times our calendar year 2001 sales estimate.
Despite a pull back in some of the optical stocks, we think
that Avanex deserves a premium valuation reflecting its
rapid growth, strategic positioning, and strong product
roadmap. We also expect a series of positive catalysts in the
foreseeable future, including revenue upside, trials of
PowerShaper, and contracts with major customers for
PowerMux. We believe that the demand for optical products
that are easily scalable could be significant and we remain
very bullish on Avanex’s prospects in this space.
Key Investment Positives
· Products address key challenges of next-generation
optical networks. Key challenges include: (1) how to
increase the number of channels of light on a single fiber
above currently available levels; (2) how to address the
issue of chromatic dispersion on legacy fiber, and; (3) how
to add and drop wavelengths without requiring optical-electrical-
optical conversions. Avanex’s PowerMux, award-winning
PowerShaper, and PowerExchange products
address these challenges.
· Rapidly growing market. While it is difficult to predict
the size and growth of new markets, we believe that
Avanex’s products have significant potential. There is wide
agreement that the optical components industry is booming.
Industry forecasters RHK recently updated their estimate of
the 1999 market for terrestrial optical components from $1.4
billion to $1.6 billion, and their forecast for 2003 from $7.0
billion to $8.2 billion. The push to higher channel counts
and higher speeds should result in a large and rapidly
growing market for Avanex, in our opinion.
· Close relationship with carriers. We believe that
Avanex’s products enable substantial improvements in
dense wave division multiplexing (DWDM) system
performance. We expect some equipment vendors to work
with Avanex to optimize their systems by using Avanex
products. Similarly, we expect some service providers to
work directly with Avanex to define their requirements and
to optimize their specifications.
· Customers include leading vendors and service
providers. To date, Avanex has booked revenue from
customers including WorldCom, Osicom, Hitachi, Cerent,
Lucent Technologies, and Nortel Networks. Prototypes or
trial systems have been shipped to customers including
Lucent, GTE, Nortel, Fujitsu, Sycamore, Cerent, Pirelli
(Cisco), Siemens, and Hitachi. We expect WorldCom to
account for about 60% of Avanex’s total revenue at the end
of the year and the company added Fujitsu as a 10%
customer in the third quarter. |
