Great post from the AVNX thread:
Who Do You Trust?
For those of you who remember the mid 50's CBS game show hosted by Edgar Bergen.....
And now....it's time to play.....Who do you trust?
Two articles published today paint diametrically opposed views on the optical networking industry for the year 2001 and beyond. Dale Baker presents
a rosy picture for the future, noting that "no other sector in technology will grow like optical communications in the next twelve months." He quotes
studies on optical networking capital expenditure spending projections, and notes how optical networking spending this year has already far exceeded
the most optimistic projections made this time last year.
In the other corner, we have Paul Sagawa of Sanford Bernstein, and more recently (today), Susan Kalla , of New York's BlueStone Capital Partners.
Ms. Kalla is predicting "an enormous market shakeout looming for companies such as JDS Uniphase by early 2001." She goes on to add, in a 26 page
report, that "Telecommunications carriers don't buy unless they can achieve a greater than 50-per-cent cost benefit or they have to upgrade to
compete. So, without new competition, you enter a status quo period where the players don't have to do anything." She added that the slowdown
period may last until 2004, and that by the first quarter of next year "it will be obvious, and it will by ugly".
Let's assume for the sake of argument that Mr. Sagawa and Ms. Kalla are correct. Let's also consider the fact that the CEO's of Cisco, Corning,
JDSU, SDLI, Avanex, Sycamore Networks, and Applied Microcircuits are all saying that business is booming and will continue to boom for years to
come in the optical networking business.
In order for Mr. Sagawa and Ms. Kalla to be correct, all seven of these CEO's must all be wrong. That's an indisputable conclusion.
And if these CEO's are wrong, then they are all making major mistakes by investing to increase capacity and by leading with strong guidance for the
coming year. Also indisputable.
But assuming that Mr. Sagawa and Ms. Kalla are correct, there are but three possible explanations for how these seven CEO's can be wrong:
Mr. Sagawa and Ms. Kalla have access to more and / or better forecast data than the CEO's of these seven companies. Sorry, I reject that notion
entirely. If Mr. Sagawa and Ms. Kalla were really that good, they would be in charge of forecasting at two of these seven companies.
The CEO's of Cisco et al are all blind to what is happening in the real world. In this scenario, everyone has access to the same data, but Mr. Sagawa
and Ms. Kalla are interpreting the data correctly and the seven CEO's are, for whatever reason, interpreting it incorrectly. Indeed, the day after John
Chambers raised earnings and revenue estimates for 2001, Mr. Sagawa said that Cisco was "putting on a brave face" and Cisco's earnings growth
would decelerate. Well, Mr. Sagawa is correct, then he should probably replace John Chambers as CEO of Cisco because he obviously understands
Cisco's business better than Mr. Chambers..
The CEO's all know that a major slowdown is coming, and they are all conspiring to pump of the stock prices of their respective companies so that
they can engage in heavy insider selling at inflated prices. This explanation doesn't wash with me either -- stockholders would file class action suits that
would put these companies out of business if this were the case.
So out of three possible explanations, one is possible, and for that to be true we would have to believe that Mr. Sagawa and Ms. Kalla are more
credible predictors of the future than the CEO's of seven major corporations. Speaking only for myself, I'm not buying that.
Fortunately, we don't have to base our decision entirely on "Who do you trust?". Book to bill ratios in all of these companies is greater than 1, and
several of these CEO's have guided revenues and earnings estimates higher for 2001. And all of these companies are aggressively increasing capacity to
keep up with what they describe as exponentially growing demand.
In determining who to trust, I for one look for patterns. If I were getting mixed messages from these CEO's -- if some said that business was booming,
and others were using slightly more cautionary language, I would be well on the way to believing Mr. Sagawa and Ms. Kalla. But I think it would be
unlikely for all seven CEO's to get blindsided by a slowdown in optical networking growth. For this to happen, all seven CEO's would have to be, well,
incredibly stupid or blind. And I just don't think that's the case.
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