{includes ntop} Did you miss the next big thing?
Wall Street Journal -
December 7, 2003
"Analysts recommend that investors focus on companies establishing themselves as VOIP players -- such as Net2Phone, AudioCodes and Verso -- that may have more growth ahead. AudioCodes should record its first profit next year, according to Ittai Kidron, an analyst with CIBC World Markets."
Did You Miss the Next Big Thing?
By GREGORY ZUCKERMAN
jsonline.wsj.com
The Nasdaq Composite Index has soared 45% this year, and tech and telecom shares are leading the overall market higher, despite a hiccup Friday.
But it's not the perennial leaders in these areas that are carrying the market. One stark example: Microsoft is actually down 6% in the past year.
Instead, there is a group of hot stocks in newfangled areas, such as Internet phone calling and satellite radio, that are surging. Investors have shifted into these growing sectors in search of the next big thing. But now, many of these stocks trade at expensive levels and should be avoided, according to some analysts. Other stocks, however, still represent opportunities for investors trying to take advantage of expanding areas of the tech and telecom world.
"The name of the game this year has been riskier" stocks with lots of upside, but also significant potential downside, says David Sowerby, a portfolio manager at Loomis Sayles & Co. in Detroit.
Among the most intriguing of these companies are those that enable calls to be routed over the Internet or other data network, something that technology aficionados call "voice over Internet protocol," or VOIP. Companies and individuals are shifting to this kind of calling, which converts voice into data and sends it along the Internet the same way an e-mail, photo or text file is sent.
The reason for all the excitement: The potential for cost savings is enormous because transmitting data is much less expensive than transmitting voice. And when voice and data travel on the same network, many new features can be offered, such as listing e-mail and voice messages together on a computer screen. By 2006, more than 50% of all phones used by businesses will use VOIP, experts say.
So what companies are the early leaders in this area? Analysts point to a group including Net2Phone, SpectraLink, Verso Technologies, VocalTec Communications, AudioCodes and Sonus Networks.
Past Their Prime?
The problem for investors getting in now is these stocks already have soared. Shares of SpectraLink, based in Boulder, Colo., for example, have more than tripled since April. Sonus, a manufacturer of VOIP equipment, is up -- get this -- 600% in the past year.
Can the surge continue? Some point to VocalTec, an Israeli company that is a pioneer of the business, as a sign of caution. The rush into VOIP stocks catapulted shares of VocalTec from under 50 cents a share at the beginning of the year to $7.60 in July. But as the stock rose, so did expectations for the company, making it harder to impress the market. As a result, VocalTec's stock has drooped back to about $4.40, raising concerns that others who have soared could face similar resistance if they don't trump growing expectations.
Analysts recommend that investors focus on companies establishing themselves as VOIP players -- such as Net2Phone, AudioCodes and Verso -- that may have more growth ahead. AudioCodes should record its first profit next year, according to Ittai Kidron, an analyst with CIBC World Markets.
An even safer and perhaps more profitable strategy is to target larger companies branching into Internet calling. These firms, such as Comcast, Avaya and Cisco Systems, all will do well as companies embrace VOIP calling, but won't be rocked if the business takes longer than expected to grow since they get profits from so many areas.
Comcast could profit if VOIP phones in the home become popular because the giant cable company will launch VOIP service next year, luring new customers and helping it retain current ones.
At the same time, Cisco is a leading supplier of VOIP phone systems to businesses, selling about $250 million of VOIP equipment and phones in the third quarter of this year, according to Eastern Management Group, a telecom-research firm. Cisco is expected to rack up $1 billion a year in revenue from the business next year, however, bolstering its bottom line. Avaya is a leading seller of VOIP phone systems to businesses and its shares have room to grow, according to Krishna Rangarajan, an analyst at CRT Capital Group.
The growing embrace of VOIP could hurt telephone giants such as Verizon Communications and SBC Communications if more people turn to cable companies offering VOIP calling.
Going Mobile
Another telecom area that Wall Street is focusing on is mobile-phone sales. As phone numbers become portable, more people will be buying new phones, while others will switch providers. For now, it's unclear who will be the winner.
Instead, some analysts recommend placing bets on Qualcomm, which makes the technology behind mobile telephones. Last week, Qualcomm raised first-quarter profit and sales forecasts amid expectations that phone-chip shipments will jump. The company's executives pointed to the new rule allowing users to keep their phone numbers as a positive for the company. Strong demand for mobile-phone handsets in Asia also is helping Qualcomm sales.
Meanwhile, satellite radio is a new rage, helping shares of XM Satellite Radio Holdings surge to $23.20 from $2.15 in just the past year. While that rise is causing some investors to bite their nails, some say growth could continue. The company is the largest satellite-radio provider in the U.S., with one million subscribers, and the subscriber ranks should grow at least 20% in the next year. Revenue rose fivefold in the third quarter, though the company's losses expanded. XM provides 101 digital channels and increasingly is being provided in new cars.
Another hot area: online sales of music. As consumers learn to legally trade and buy music over the Internet, shares of Roxio have soared. Roxio recently bought the well-known Napster unit, and the company allows consumers to buy songs over the Internet for 99 cents each. Roxio shares shot up to more than $11 from $4 in the past year.
But in just the past month Roxio stock has fallen to about $5 as investors focus on the fact that Apple Computer and some other big names -- including Wal-Mart Stores, Microsoft and Sony -- all will be major players in online music sales. That will make it difficult for Roxio, and some urge caution on the stock. At the same time, profits on online music sales are thin so far. Says a hedge-fund manager: "I would be scared of Roxio. There's just too much competition." |
