From Upside.com
Looking for fiber-optic gems
July 19, 2001 12:00 AM ET
by Rex Crum
In the past year, the fiber-optic industry has gone from the top of the mountain to the bottom of the gutter.
If last summer you had told anyone in the fiber-optic telecommunications industry that a company like Nortel Networks (NT) would report a $19.2 billion loss, like it has said it will do today, you probably would have been offered the opportunity to invest in the burgeoning rotary-dial phone business.
But times change and it is doubtful even the Psychic Friends Network could have foretold the fall of fiber optic-related companies such as JDS Uniphase (JDS) and Corning (GLW). Nor could most have predicted the glut of fiber-optic bandwidth in the long-haul network market.
Diamonds in the rough
However, despite the cloud of uncertainty hovering over the fiber-optic industry, there may be some diamonds in the rough out there. Apparently there were enough gems at the recent National Fiber Optic Engineers Conference (NFOEC) to make some fiber-optic watchers walk away with positive feelings about the trends and companies that could drive an industry turnaround.
Joseph Wolf, a networking analyst with UBS Warburg, said optical systems production needs to step into the 21st century. The process of building fiber-optic components is antiquated by most technology standards. Much of the work in putting together things like amplifiers, filters, lasers and switches is done by hand and there are few standardized assembly processes. So much manual labor and customization also drives up costs along the assembly line.
"It seems to us that manufacturing techniques and automation will be critical," wrote Wolf in a research note. "We believe that improved processes will enable the cost reductions for more mature components. We also expect that as the optical components industry matures, that next-generation components will be designed with more of a focus on volume manufacture and uniformity."
Wolf did not list which companies he felt might be able to improve the fiber-optic manufacturing process. Tim Savageaux of WR Hambrecht, however, placed bets on the fiber-optic players he saw at NFOEC that may be in a better industry position than others.
The place the be
When it comes to fiber-optic networks, the metropolitan, citywide space is said to be ripe in opportunity for equipment makers. While the long-haul market may be going through an overabundance of fiber and access, analysts say the metro space is screaming for more bandwidth.
In the metro space, Savageaux said Ciena (CIEN) remains his top pick. He said a key area for Ciena's growth is the optical switching market, where the company's CoreDirector product continues to receive high praise.
"We continue to see very little in the way of competition [for CoreDirector]," Savageaux wrote in a research report. Savageaux cited solid new products and customers such as Qwest (Q) and Sprint (FON) as reasons why Ciena has remained a strong competitor in the volatile fiber-optic space.
How long that market will remain volatile is nearly anyone's guess, though. A year ago, investing in fiber optics was considered a no-brainer. It's possible that a year from now, it may be again.
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