[News.com article "Networking sector poised to rebound."
ASND references]
news.com
Networking sector poised to rebound
By Suzanne Galante
Staff Writer, CNET NEWS.COM
March 4, 1998, 12:10 p.m. PT
URL: news.com
Networking stocks may be coming back in to the high life again.
Donaldson Lufkin & Jenrette today raised its rating on 3Com (COMS) to "buy" from "market
perform." Last week, Bay Networks (BAY) was picked up by Deutsche Morgan Grenfell with a
"buy" rating, and Oppenheimer & Co. initiated coverage on Ascend (ASND) with a "buy" rating.
DLJ analyst Steve Coffler said the upgrade of 3Com is company-specific and does not
necessarily signal that the sector as a whole has improved. A handful of networking companies,
however, have seen their stocks pull up off December and January lows, and analysts say that a
favorable upswing in tech stocks in general and the establishment of a modem standard,
combined with bright future business prospects, are boosting investor confidence in the
networking sector.
Ascend, which has a 52-week high of 60, was down as low as 22 in December. Today it is
trading near 35 a share. 3Com, which had a year high of 59-11/16, fell to 29-7/8 in January. It is
now trading at nearly 38 per share. Bay, with a 52-week high of 41-7/8, fell to 24-1/8 in
December before rebounding to about 32.
Coffler explained that 3Com is at the tail end of its downside, and noted that the uncertainty
surrounding the company "is more or less removed." 3Com had reported an 87-percent drop in
second-quarter profits, which it attributed to excess inventory from its modem business and its
shift to a new product line. Other problems included lower earnings from the economic troubles
in Asia and a shareholder lawsuit that alleged certain executives misled investors about demand
for 3Com products acquired through the company's merger with US Robotics.
Coffer said the new product line that once was a drag on earnings should be a catalyst for the
company going forward.
That product news is company-specific to 3Com and does not mark a trend for industry growth
overall, he said, noting that while some networking stocks have shown improvement, there has
not been a fundamental change in the activity of other companies in the sector, like Cisco
(CSCO) and Bay.
Michael Graham, an analyst at Raymond James & Associates, agreed that the latest upticks do
not indicate a sweeping improvement in all networking companies, but rather a selective
advance. A large amount of uncertainty continues to linger for these companies, he said.
Asia is still a concern, and people are wondering about the next evolution of the network, he
explained. Today most information transmitted over networks is voice and data, but in the future,
it will be multimedia. Consumers will need to have multimedia-enabled lines that can handle this
dense information in a speedy manner, he said, which provides a growth opportunity for some
companies.
Indeed some in the networking field are trying to nudge their way into the growing data
networking market by partnering with smaller companies focused on the latest
technology--companies that aren't being held back by existing customers.
"One thing helping these stocks is speculation on how they will get in on this new business," said
Graham.
In February, Bay Networks finalized its $37.6 million equity investment in NetSpeak (NSPK), a
maker of IP (Internet protocol) telephony technology. The companies will team to build new
networking systems for handling voice and fax services based on IP.
"Bay appears to have successfully brought to market a full line of switching products, in both the
low and high end, to sustain its recovery," said a recent Bear Stearns report. "In our view, with
expanded product offerings through acquisitions and internal development.Bay has made
significant progress in gaining customer acceptance as a potential source of networking
solutions."
ATM LAN switch, ATM WAN switch, and LAN switch segments were predicted by Merrill
Lynch to be the fastest-growing data networking markets in 1998. The brokerage firm estimated
also that those three segments account for 33 percent of Cisco's revenue, 84 percent of Fore
Systems' revenues, and 34 percent of Bay's revenues.
"These companies are well-positioned to continue to benefit from growth in these markets,"
Merrill Lynch's recent report said.
Other companies are likely to benefit from the 56-kbps modem standard, said Graham.
Bay Networks, for example, said about a week ago that it has completed testing of the new
standard for 56-kbps modems and will begin offering remote access supporting the standard
next quarter. In mid-February, 3Com became the first vendor to ship a 56-kbps modem based
on the new international standard.
In addition to these company-specific advances, the tech sector in general has been on a
favorable upswing lately, which also is a factor, said Graham. "Even in face of Justice
Department, Microsoft is up." Since the New Year, the tech-heavy Nasdaq has gained 11
percent to close yesterday at 1757.14.
One exception to the favorable stock movement is Cabletron Systems (CS). The company said
this week that its quarterly revenue will drop below year-ago levels due to a shortfall in sales for
some parts of its business.
Cabletron's stock, which has a 52-week high of 46-1/2, is trading near its year low at around 14
a share.
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