Frank,
As the voice of prudence and reason on this thread, I can understand that you would be concerned about any argument for any stock that you view as "dangerous" and "speculative." Unfortunately, I cannot tell whether you indicted the stock or my argument with those two words. What is your intended referent here for "dangerous" and "speculative?" Is it investing in JDSU or in my argument in JDSU's favor?
Of course, if I regarded investing in JDSU as "dangerous" or "speculative," then I would not be invested in it. JDSU is not the investment for anyone holding those views of it. All investing is an exercise in balancing risk and reward. I do not believe that I do that better than you or other thread members; each of us ultimately has the responsibility for our own decisions.
However, it may well be that your reaction is less to the stock itself than to my argument in favor of the stock. So I need to examine your points in turn, possibly using both interpretations of what you might mean. But first, let us see if we can agree when investing becomes speculation.
I admit that the argument, the reasoning, the process of analysis interests me, sometimes even fascinates me. And, to that extent I enjoy "speculation" or theorizing or analyzing, but I enjoy it not as an end in itself, but as a practical means of selecting superior companies. Of course, I would characterize my speculating as speculative given its denotative meaning as contemplation, conjecture, or abstract reasoning, but I do not, although you may, regard it as "speculative" in a way that connotes excessively risky, as in "Don lost his life savings speculating in the stock market." I believe that both of us would think of day traders as speculating in that negative sense, and, possibly we might include the use of sizable margin, or of momentum investing, regardless of a stock's fundamentals as speculative, but not investing in a stock that is at least a King in a royalty game.
Because we both endorse long-term-buy-and-hold and the use of fundamental analysis, and the fundamental for JDSU, as Bruce reviewed them today, are so outstanding, that form of risky speculation does not appear to be a serious issue. So, if I understand your perspective, this is may be your contention: that the gorilla lock-open proprietary architecture with high switching cost-is a trump over JDSU's set of competitive advantages. Fleshing out your point, that arguing, as I do, that JDSU might gain a similar proprietary lock based on the architecture of modules or systems on a chip in the future depends on events that are necessarily less certain than a present-day-lock that is signed, sealed, and patented. Life is uncertain, as is stock selection. Of course, if your key point is indeed that a proprietary present is more rewarding with less risk than an unfolding future that may or may not contain such a lock-in, then I concede it as obviously true. However, my argument is not that JDSU is now a gorilla, but a kingilla having some degree of control over its value chain through its ability to sustain innovation.
My only reservation about limiting myself to investing in proven gorillas is this: if Moore says catching the technology wave is at the core of competitive advantage and that the Internet is the 100X change, I want to catch that huge technology wave. Just as advances in microprocessor technology powered many discontinuous innovations during the PC era, I believe that advances in DWDM, which is itself a discontinuous innovation, will power this new, larger wave that may include many more DIs. It is a bet that Gilder is right when he calls JDSU the Intel of the telecosm.
After deciding that I wanted to risk riding this new technology wave, because, for me, the rewards are worth the risk, I chose to invest in DWDM infrastructure as a relatively safer play, a picks and shovel play, in contrast to gold dust fever of dot.coms. To invest in a King in a Tornado is not excessively risky and may be extremely rewarding. (Personally, I take more risk than this on this new technology wave because I am also invested in GBLX, but let me defend that choice some other time.)
You said, "Strong forces indeed, but the sum of jdsu's actions don't equate to strength of a discontinuous innovation, and when examined individually, have dangers associated with them."
If I interpret your sentence correctly, I believe that you mean that the sum of competitive advantages advanced by me for JDSU are less strong than the competitive advantage given by a gorilla having proprietary control of a discontinuous innovation. Again, I would concede this point. So long as we keep in mind that it is a ratio of risk versus reward that we seek to balance. Catching the new 100X technology wave adds a lot to the potential for rewards; and, given that all members of a market segment participated in this wave, this reduces some of the risk. Your strategy of investing in Cisco and Intel is more conservative, but not necessarily more rewarding.
Still you seem to claim that three competitive advantages may be "dangerous," from your perspective, they appear to be, "diluting acquisitions," "vertical integration," and, "end-to-end solutions." (Not forgetting that you might mean my argument was "dangerous.") Now, let me address each of these competitive advantages in turn.
Acquisitions. I do not believe that JDSU is trying to corner the market the way the Hunts tried to corner the silver market a few years ago. I have at some point used that word "corner" when a better choice is "achieve critical mass," which I did use in the paragraph of mine that you site to open your critique. If your concern is dilution by acquiring ETEK or SDLI, I believe the first was and the second will be accretive to earnings. These companies are not start-ups, but are already profitable firms that also cannot meet the strong demand of the DWDM market. All of the component companies lack the capacity to meet the demand for their products. A major argument in favor of the DOJ approving the SDLI merger is that it will increase both innovation and the overall supply of components.
Vertical Integration. In the JDSU case, we are not speaking of the acquisition of companies in the style of the conglomerates of the 1970's. JDSU is not a United Technologies buying Pratt Whitney for airplane engines, Carrier AIR Conditioning, an elevator business, Sykorsky helicopters, Hamilton-Standard, and GM parts. Nor are we discussing a vertical strategy like a paper company who owns the forest, the train line, the sawmill, and the paper mill, trying to integrate a chain running from the raw materials of trees to the finished product of toilet paper.
In the sense that I used "vertical," it refers to the process of adding value by building modules that contain say, the source laser and the modulator, so Lucent or Nortel will not have to assemble them. As a CSCO bull, you must appreciate that when Cisco acquires a software company and adds the acquisitions' software product, say a security feature, to its Internet Operating System that this is a vertical integration that adds value to the IOS. Same deal; same logic.
I believe, based on Fault Line, that what Moore describes as flawed are businesses who do not clearly define their core function as adding competitive advantage and who fail to shed everything else as context suitable for outsourcing. I do not think this criticism fits JDSU who is focused on adding capacity to produce their core products of components and modules. Recently, I believe they announced some subassembly outsourcing to Celestica. Although, they are not nearly as advanced as Cisco is here, it seems to me that this criticism is misplaced.
End-to-End Solution. Again, just as Cisco gains a sales advantage for offering a complete solution, so does JDSU through its breadth of components and modular strategy. But, this seems to be too obvious to have been you point.
Could it be that your point refers to this sentence of mine that you quote? "Moreover, at some point these modules become complex enough to have an architecture that could become proprietary; some may already be proprietary as process know-how."
I believe it is that sentence that you are characterizing as "interesting, but very speculative, Don…" I believe that "speculative" as used here is intended to mean something like "a theoretical conjecture that may not be practical or that might not work out in practice." That would be consistent with your request for suggested means od testing my theory. Although it might not work out in practice, the proof will be in the pudding: does JDSU succeed in eventually producing a system-on-a-chip that has process patents that slow other companies down in finding ways around such a patent? Does JDSU develop a proprietary form of optical switching through its Cronos acquisition or by combing technologies from several acquired divisions? If so, my theory about modular complexity involving an emergent architecture works; if not, it doesn't. If it does, JDSU morphs into a gorilla; if not, it remains a strong king. In either event, it is a damn good investment.
Also, you added this sentence as an apparent after thought, "btw has it struck you that optical networking has engendered the same boundless optimism and price-to-vision valuations that were associated with the dot.coms last year." Is this intended to be guilt by loose association?
Moore would not value JDSU by P/V; it is not start-up. This is a major corporation with 30 facilities spread around the world employing over 17,000 people. Moore would use P/S as his valuation metric for JDSU. Frank, that final btw is plain FUD.
I hope this helps because it wears me out to try not only to respond to a counter-argument but also to figure out just what argument is intended.
Don |
