barron's update... now do we sell off on Monday?
ptical Illusion?
I uncovered a lot of latent hostility last week, after writing about research on
the Internet transmission delays known as "latency." The research by Sanford
C. Bernstein analyst Zhiping Zhao argues that incipient rises in Internet latency
mean that network operators will have to start buying components from firms
such as JDS Uniphase and Agere Systems. As JDS Uniphase shares jumped
from 2.90 to more than 4 last week, and Agere shares rose from 1.84 to
2.70, rival analysts called latency a fallacy and warned investors about the
stocks.
Let me add my warning that even if Zhao's right on the money, four bucks is a
lot to pay today for the 26 cents Zhao says JDS will earn in the year ending
June 2005.
Zhao confessed that she couldn't tell whether latency was caused by
congestion in the optical layer of networks supplied by JDS, or in the
electrical switches known as routers. George C. Notter,
telecommunications-equipment analyst at Deutsche Bank's San Francisco
office, says the congestion is in the routers. Any spending to reduce latency,
Notter argues, will first benefit router makers like Cisco Systems and Juniper
Networks and, much later, the optical firms like Ciena, Lucent Technologies
and Nortel Networks that are JDS's customers. Meanwhile, carriers have
equipment from underused links that they can redeploy to links where traffic's
growing.
Capital budgets continue to decline at telecom carriers, says Morgan Stanley
networking analyst David A. Jackson. "In the post-bubble world," Jackson
said in a report Thursday, "corporate investment is no longer driven by traffic
growth, page views, minutes of use or number of subscribers. We believe
spending is driven by one metric only: expected return on investment."
Like Bernstein's Zhao, Raymond James analyst Todd Koffman has been
studying network links. For a year, the St. Petersburg, Fla., analyst has
measured traffic on a half-dozen network links of Metromedia Fiber. That
network's AboveNet unit discloses network data at the Website
west-boot.mfnx.net/traffic.
Koffman reports that peak utilization on those pipes is down to mid-20%
levels -- around half the level of a couple of years ago. "It remains our view
that excess capacity in the network remains," Koffman wrote Thursday, "and
a large-scale network upgrade is now at least 4.3 years away."
Bernstein's Zhao says she welcomes the debate, and she's sticking to her
guns.
Latency delays will anger business customers, she argues. AT&T business
customers pay extra for quality-of-service guarantees that include low latency
levels. And if AT&T suddenly begins ignoring customer complaints -- as
some fear it will, now that WorldCom is out of the picture -- it won't be able
to ignore latency problems because delays would mess up the network's
operation. Even carriers in bankruptcy, such as Europe's KPNQwest, will
spend money to prevent network deterioration.
The Bernstein analyst concedes that demand will remain a long way off for
purely optical components that have long shelf lives and high prices. Such
products are made by Corning, and to a lesser extent, by JDS Uniphase.
Continued advances in electronics, however, will sustain demand for the
products of JDS and Agere that are known as transceivers.
"This idea of looking at latency is something new," she admits. "Let's all see if
it works." |
