Gottfried, Thanks very much for posting that. If that article is correct, then the communications chip stocks and fiber optic stocks will not be a very good investment over the next year or so (assuming the stocks rise about 6 months before the sector turns).
Briefing.com talked about the telecom stocks today and suggested that a few of them are a good investment here. Below is a link to the article, plus some selections from the article.
I think Briefing.com makes a good point when they point out that this "bandwidth cycle" is something that we are not familiar with yet. I have heard many arguments that this downturn will last a long time, and these arguments may be correct. However, if the experts could not even forecast that there would be any sort of downturn before, why are they going to be correct now in specifying as to how long this current downturn will last? I guess I am a bit skeptical of the experts with regards to their ability to predict how this thing will turn out. There seems to be a bit of a disconnect between the statements from carriers such as "data traffic doubling every 100 days", and the idea that this sector will be in the dumps for years. I don't know the answer, but it sure seems like the money will come from somewhere to meet user demand for this build-out of the internet. I am still trying to figure this out though, but I remain a skeptic when it comes to the experts being able to forecast any sort of industry cycle, especially one that is a new sort of animal. I recall back in 96 hearing that AMAT would be dead money for a year. I thought to myself, that would not be bad to just have to wait a year, so it bought it anyway. Turns out they were wrong back then, the stock went way up during that year, so maybe these guys could have it all wrong now as well.
That is my argument anyway. I am not sure it makes a lot of sense. It is just a simple sort of contrarian argument. I think my approach is going to be to nibble into this sector, just in case they have it dead-on with these forecasts of a very prolonged downturn.
Regards,
John
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www2.briefing.com
The Bandwidth Cycle
08-Jun-01 00:20 ET (selected sections from article:)
[BRIEFING.COM - Gregory A. Jones] Everyone knows to trade the semiconductor cycle; so much so, in fact, that semi stocks have traded up sharply this year solely on the hope that a bottom might be found in the second half of the year. But with the shift from the processor paradigm to the bandwidth paradigm still in its relative infancy, few investors seem to be considering the possibility that bandwidth might also be a cyclical investment phenomenon. For those who do believe in a bandwidth cycle, the long-depressed telecom carriers are suddenly looking like a good bet.
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PSINet, Winstar, Teligent, NorthPoint, Advanced Radio, GST Telecom, ICG Communications, eSpire. If this were Jeopardy, you would now ask "What is the telecom graveyard?" The list of Chapter 11 filings grows longer, and there are many more to come. The debt burdens among emerging carriers are simply crushing, and revenues are not rising quickly enough to stave off many more failures. That's bad news if you invest in the losers, but good news if you pick the survivors.
Just as semiconductor companies overbuild capacity in good times and then suffer in bad, so too has the telecom sector. Soaring data revenues fuelled by the dot-com boom and readily available capital triggered a surge in capacity over the past few years. But now the capacity growth rate is slowing as emerging carriers fail or severely curtail expansion plans, and new entrants are non-existent.
In the semiconductor sector, stocks are bought even in anticipation of the downsizing in capacity. In the telecom sector, that downsizing started a year ago, and yet still no one wants to buy these stocks. But the dynamics are the same -- demand growth will speed up and slow down alongside the macro-economy, but the long term trend in the bandwidth demand is quite clearly up, and at a good clip. Growth in supply, meanwhile is slowing markedly. That's the point at which you want to buy the purveyors of bandwidth.
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The gloom of the telecom sector has been shared by carriers and equipment vendors alike, as the debt loads crippling the carriers have forced capex plans to be scaled back dramatically. But there is a silver lining here for the carriers that can survive the downturn. What had been a sellers' market for the latest, greatest telecom equipment is now a buyers' market.
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Just as we undoubtedly left out some of the negative factors that depressed the telecom group in recent years, we have probably omitted a positive point or two. As we continue to follow this story in coming months, we will report on any other positive factors, and we will monitor the sector for evidence that the factors noted above are or are not coming to pass. But it's not too early to start to test the waters of the telecom service sector, as this group should outperform over the coming year.
In future briefs, we will delve further into individual stories, but we can at least provide a glimpse here of how the sector is shaping up. As we have noted, it will be critical to focus on the survivors. There will most likely be a few emerging carriers that recover and provide shareholders with great returns from current depressed levels, but we would not opt for these home run picks given the high risk of a complete loss. We would focus instead on the safer plays, because we believe they offer significant upside potential with far less risk.
The least sexy group is the Baby Bells, where SBC Communications (SBC) and BellSouth (BLS) look like better stories than Verizon (VZ).
More interesting are the hybrid incumbent/emerging carrier cos: Qwest (Q) and Broadwing (BRW), which offer the stability of local phone revenues and the upside of advanced fiber networks that can benefit from future growth in data traffic.
Long distance carriers Worldcom (WCOM) and Sprint (FON) are also worthwhile plays, and safer than debt-ridden AT&T (T).
New IXCs (interexchange carriers) are generally a risky bunch with heavily indebted names like Level 3 (LVLT) and 360Networks (TSIX), but Global Crossing (GX) still looks like a survivor.
Then there are the CLECs -- here is where you can probably hit a couple home runs, but we would steer clear of the risk.
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