Glad I don't have to pay for this garbage... ;-)
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Tech Stocks : Networking
Instead of Going Public, Promatory Prefers to
Merge
By Kevin Petrie
Staff Reporter
1/6/00 10:20 PM ET
SAN FRANCISCO -- Underscoring Wall Street's lack of enthusiasm
over companies in the digital subscriber line industry, DSL
equipment-maker Promatory Communications opted to sell itself to
another company rather than go public.
The $778 million in stock that Nortel (NT:NYSE - news) is paying for
Promatory is sober, considering its DSL equipment peer, Copper
Mountain Networks (CMTN:Nasdaq - news), boasts a market cap of
$2.4 billion. But watching rivals' valuations soar doesn't sway
Promatory CEO Roger Dorf. "There's always the risk that goes with"
trying to please investors after achieving such lofty levels, Dorf says.
He declined to comment on how the price was negotiated.
Perhaps more significantly, Promatory might not have enjoyed much
mania. Even as DSL technology is positioned to go mainstream this
year, this long-anticipated technology still lacks sex appeal. Copper
Mountain's valuation, while comfortable, lags the manic levels of other
bandwidth companies such as Juniper Networks (JNPR:Nasdaq -
news), the builder of Internet routers, and Sycamore Networks
(SCMR:Nasdaq - news), whose systems ferry light signals through
optical fiber. Fiber-optic companies are popular because they intend
to redefine the way traffic moves through networks.
A recent downturn in all these stocks hasn't erased the gap between
DSL and other bandwidth plays. Since going public early this year,
Copper Mountain has swelled to its $2.4 billion market cap, or 30
times its revenue, in the past four quarters; another DSL supplier,
Efficient Networks (EFNT:Nasdaq - news), has risen to $2.3 billion,
or 89 times revenue. By contrast, Sycamore is valued at $20.2 billion,
or 666 times revenue, and Juniper is at $16.2 billion, or 265 times
revenue.
"There's a higher premium paid for companies that actually define the
paradigm shift, such as Juniper," says Phillip Coburn, global
technology strategist with Warburg Dillon Read.
But many of the DSL companies are simply executing a
long-expected change in network deployments: reaching the end-user
with plain copper wire. Copper Mountain officials declined to
comment for this story, citing an SEC-enforced quiet period before
the release of its earnings for the January quarter.
Certain realities make DSL a growth story rather than fuel for investor
mania. Earlier suppliers have suffered as local telephone companies
stalled the deployment of DSL in order to protect their old "T1" data
services. Even as the phone companies rumble into action, DSL
alternatives such as cable and fiber-optic systems are emerging,
which have less history but more promise than DSL itself.
"Perhaps [the DSL] market is too well understood," says equity
analyst Tim Savageaux with Prudential Volpe Technology Group.
"You're able to apply metrics to it in a way that you cannot with some
of these other segments." While not manic, Savageaux is bullish. He
expects Copper Mountain to claim about 20% of the estimated $750
million DSL business in 2000. Savageaux rates Copper Mountain a
buy and sets a six-month price target of 60, or 19 times his revenue
estimates for 2000.
By contrast, the North American optical market will grow to more
than $5 billion in sales in 2000 from $3.1 billion last year, according
to research firm RHK. "The optical industry is much faster moving"
than DSL, says Joe Savage, vice president at RHK. Just a few orders
from phone carriers create mammoth revenue gains.
The very word "optical" carries its own magic. Sycamore's successful
IPO last October spurred interest from customers, investors and
potential employees in private optical start-up Quantum Bridge
Communications, says Quantum marketing VP Jeff Gwynne. But in
the same office building, less attention has been lavished on
Interspeed (ISPD:Nasdaq - news), a DSL company working with
copper wires. Interspeed's stock wallows near 17, just below its
first-day closing price in September.
One lingering problem for DSL is its earlier disappointments. Westell
(WSTL:Nasdaq - news), an early DSL star, trades near 10, down from
a high of 56 in June 1996, thanks in part to delayed implementation
by carriers and price competition from Cisco (CSCO:Nasdaq - news)
and Alcatel (ALA:NYSE ADR - news). In its niche, Copper Mountain
expects to face severe competition from its own partner Lucent
(LU:NYSE - news). And despite high growth, DSL products tend to
fetch lower profit margins.
In fact, many of the highflying stocks sell high-capacity,
software-intensive network systems that promise high profit margins.
While Juniper is posting net losses, it posted gross margins of 58%
in the September quarter, topping Copper Mountain's 53% in the
same period.
Investors also can count on large, diversified suppliers to snare much
of the DSL business. Alcatel "wildly exceeded" its own expectations
in 1999 and shipped equipment for 1.3 million ADSL lines to carriers
worldwide, up from less than 50,000 lines the prior year. "For the
scale of DSL deployments, no large carrier would go to a start-up,"
says Alcatel VP Paul Segre.
Neither, it seems, is the herd of tech investors. |
