siliconinvestor.com
August 5, 2000
Compelling investments in fiber optics and wireless
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Mark Johnson, Editor of the Internet Financial Connection, provides the following interview with Jesse Soto, Senior Securities Analyst of the Highmark Mutual Funds highmark-funds.com. AudioInvestor.com provides an audio version of the interview. Click here if you would prefer to listen to the interview. Below is the write-up.
Whoever said the technology sector wasn't volatile? Tech stocks continue their wild and volatile gyrations. The Nasdaq was nearing the 4,300 level in mid-July, only to reverse course and trade in the 3,600 area recently.
Jesse Soto, senior securities analyst for the Highmark Mutual Funds, thinks the Nasdaq, along with the rest of the tech sector, should see brighter days within the next six months. He especially believes the tech market will experience a relief rally once the Fed decides whether to raise interest rates. "Once that is out in the air I think the market will begin to stabilize," Soto says.
One area Soto has been keeping his eye on is fiber optics. Fiber-optic component maker JDS Uniphase has been on a roll acquiring other companies in the optics realm, including E-Tek Dynamics and SDL. "This merger mania has put a lot of upward pressure on companies in the fiber optic space," states Soto. "The mergers in the fiber optic area bring to light how capacity-constrained this segment of the market is. It's an area that is experiencing very high demand as companies try to increase their infrastructure and provide next-generation services. . . Companies such as JDS Uniphase are willing to pay rather large sums to acquire technology. It is testimony that it is a very difficult business to get into with high barriers to entry."
Bookham is trying to do what Intel did for microprocessors
One company Soto likes in fiber optics is Bookham Technology (BKHM 58), which manufactures optical components based on SOI (silicon on insulator) wafers using traditional semiconductor manufacturing techniques. Soto adds that Bookham is addressing one of the biggest problems in fiber optics right now -- the availability of components. Soto states, "Large volume manufacturing techniques haven't been developed yet in the fiber optic component space. Many of these devices actually involve a lot of steps done by hand. By using traditional semiconductor manufacturing techniques, Bookham is trying to do what Intel did for microprocessors, which is to bring down cost through manufacturing large volumes. . . They're really the only one out there doing this on silicon. Most of its competitors are using a type of glass known as silica." Bookham's high-profile customers include Nortel and E-Tek Dynamics (a division of JDS Uniphase).
Another company Soto likes in the fiber optic space is Harmonic (HLIT 23 3/4), one of the few companies making fiber optic systems designed to increase the capacity of cable infrastructure. This technology will become increasingly important as cable companies expand their offering of enhanced services, including Internet access, telephony and movies on demand. The proliferation of these enhanced services will drive the demand for Harmonic's products.
Shares of Harmonic, which were trading at a high of $60 in early June, have become depressed and are now trading in the low $20s. One of Harmonic's main customers, AT&T, cut back its purchase of products. As a result, sales slowed down. Soto views the weakness in shares as a good entry point, saying that the weakness in AT&T's purchasing pattern is temporary, and that AT&T will resume purchase of Harmonic products after it finishes installing previously purchased products. Soto also notes that Harmonic is making progress with other cable companies and that long-term international growth should bode well for the company.
GaAs wafers are one of the main building blocks for wireless integrated circuits
Another area this tech guru likes is wireless. The stocks of many companies that have been leveraged toward the wireless area have been experiencing downward pressure. Recent reports suggest that overall handset demand is slowing and investors have become somewhat pessimistic. "Recent problems with Ericsson and Nokia have cast a dark shadow over wireless component companies," Soto says, adding that "Cellular handset growth is still very strong. We are in the face of a major upgrade cycle as cellular handsets become Internet enabled. . . I think demand is really going to pick up once these next-generation services are introduced."
One favorite in the wireless sector is Kopin (KOPN 20), which makes gallium arsenide wafers (GaAs). Used in a wide variety of wireless technologies, GaAs wafers are one of the main building blocks for wireless integrated circuits. In addition to GaAs wafers, Soto also likes the company's second line of business, flat-panel displays, which should benefit from the proliferation of digital camcorders and Internet-enabled handheld devices. Shares of Kopin have been in a downtrend mainly due to slowing handset shipments to Korea. Soto views the weakness in Kopin's stock as temporary and thinks it will "rebound nicely."
Another favorite is Qualcomm (QCOM 64 1/4), a leader in CDMA (Code-Division Multiple Access) technology. Its stock is down on concerns the company may have to give up certain intellectual property rights and sacrifice royalties. Soto believes those fears are overblown and the stock will trend higher. "The company will benefit from the development of 3G technology; they collect royalties on both of the dominant standards being proposed. Also, with the recent announcement of the company spinning off its chipset division, it should be able to alleviate a lot of the investment community's fears about sacrificing royalty revenue in exchange for participating in WCDMA chipset sales. I think this company will be one of the prime beneficiaries of the movement to 3G technologies."
Valuations are important...
Following the theme of the wireless sector, one top holding is Anadigics (ANAD 25 1/2), an integrated circuit maker in the communications industry. Shares of the company were hurt by a weakness in Ericsson, its largest customer. Recently, one of Ericsson's specialty (sole source) component manufacturers had a fire in one of its factories. As a result of the announcement, Anadigics, which supplies GaAs-based power amplifiers and RF switches, sold off in anticipation of lower sales to Ericsson. Soto states, "I think the stock has been oversold and that it represents an interesting entry point."
Anadigics is one of the largest suppliers of chips into cable modems. The company also sells chips into set-top boxes at General Instruments and to newly won customers Sony and Samsung. In addition, Anadigics also sells amplifiers into Scientific Atlanta's cable infrastructure products, and is active in the fiber optic arena. Soto believes that the strength of Anadigic's cable and fiber optic business could insulate the company from weakness from Ericsson, particularly if the company is successful in penetrating other top-tier wireless accounts.
Soto has not been active in the Internet, avoiding the portals and online e-tailors. "I think there is a lot of uncertainty regarding companies that are leveraged to an advertising platform," he says.
Soto mentions that the stocks he favors represent good entry points but are by no means riskless. He stresses that valuations are important and investors need to be conscious of what's being paid for a technology company. |
