There's a lot of discussion tonight about JDSU's future guidance, whether sequential revs in the high teens is enough to justify the valuation. And further, as a component manufacturer, a lagging indicator, whether they would necessarily be in a position to project potential spending and buildout of the optical network.
The gist of the matter
"One report? I count five now that have been very bullish. GLW, SDLI, JDSU, NUFO & even NT's can be construed as a bullish report." If you take but a moment to reflect, you'll realize that these are all component and system vendors. These are not the people who are directly impacted by the big chill in the bond markets. It is the service providers, like WCOM that you need to be paying attention to in order to judge the future prospects of the fine companies that you mentioned. Remember, the health of the component sector is a lagging indicator.
siliconinvestor.com
From briefing:
17:47 ET ******
JDS Uniphase (JDSU) 74 7/16 +3 7/16: Great report, but not great enough. Here's the
good news. JDSU beat earnings by two cents, which is to say that they were pretty much
in line, since analysts' estimates are typically low-balled by about that amount. Revenues
of $786 mln were also above estimates, but here again, not by much more than is typical
for JDSU. On the conference call, the company reportedly said that demand for optical
components remains strong and that it doesn't see any inventory issues with its customers.
Finally, it guided full year EPS estimates higher to $0.80 from the current consensus of
$0.70. And now for the bad news: this is not enough to bring back the optical sector for
two reasons. First, there has been a bubble in optical sector valuations, and when a
bubble pops, valuations contract, even with occasional good news from companies in the
sector. Note that JDSU's P/E for this year is at roughly 100, even using the new
estimates. Is that rational? Maybe, but probably not. Even with estimates being guided
higher, the valuation could contract. Second and just as important: the fact that JDSU
doesn't see any demand issues does not mean that there are no demand issues. Just this
morning, Worldcom (WCOM) reported that it will reduce its 2001 capital expenditures
plan. Do you think that JDSU has seen this demand weakness yet? Absolutely not.
Sometime next year, WCOM will be less aggressive with its purchases of optical
systems. Then those optical systems companies will be less aggressive with their
purchases of JDSU optical components. Being a components maker, JDSU is very much
a lagging indicator. The key to the popping optical bubble is not the JDSUs of the world,
it's the WCOMs. That's the end-user demand, and while still strong looking back, it's
clear that there has been a change on the margin looking forward. While one can
correctly argue that this change will hit some companies worse than others, excessive
valuations were a factor for the entire sector, and all stocks in the sector will suffer as
those excesses are wrung out. JDSU has tacked on 9 points to 83 7/16 after hours at the
time of this writing, but we would caution against believing that the optical sector's woes
have ended with this one report. - Greg Jones, Briefing.com
and these two opposing replies to the briefing article
siliconinvestor.com
And Nortel
The Nortel Plunge
Erick Schonfeld at ecompany.com
Does Nortel have a cockroach problem? In Wall Street parlance, when
a company announces its first disappointing results in a while, the
situation is known as a cockroach because it often means many more
problems are hiding under the floorboards, just waiting to creep
out. Nortel's announcement that growth in revenues from its optical
network equipment business is slowing sent its stock south 18
points to $45 Wednesday, erasing more than $50 billion from its
market cap and helping to drag the Nasdaq down 5.5 percent with it.
The stock nudged up a hair in early morning trading on Thursday
only to drop another 2 points by mid-day. But unlike its
competitor Lucent -- whose first earnings cockroach was spotted
back in January and has been followed by many more, ultimately
driving the stock down 76 percent from its 52-week high - Nortel's
cockroach infestation isn't just a company-specific problem, it's a
problem that the entire market faces.
That is to say, Lucent's problems (full disclosure here, I am a
longtime shareholder) stem from its own inability to transition
from old-style telecom equipment to the newer, sexier optical and
IP (Internet protocol) stuff that Nortel and Cisco sell. Nortel
does not suffer from such management execution issues. It has been
eating Lucent's lunch in optical. So the problem for Nortel is less
company-specific, and instead may be a more serious indication of
an overall market slowdown.
It used to be that tech investors could ride a hot sector for two
or three years. But lately the rides have been getting
progressively shorter -- Internet retailers, the B2B phenomenon,
and now optical and wireless. The market jumps from subsector to
subsector like monkeys discarding one circus hoop for the next.
It's like a series of mini market bubbles, each coming and going
faster than the last -- a classic sign that the whole thing is
going to pop. And in case you think it already has popped, let me
remind you that for all the recent market turmoil, both the Dow and
the Nasdaq are merely back to the level where they were a year ago,
which means they are still at historically very high levels. For
all the anguish of the past year, and the past two months in
particular, we may still just be making our way through the froth.
Nortel is an important bellwether because if there is no hope for
optical networking, then there is no hope for the market. Optical
is way out there; it's one of the last hoops the monkeys can cling
to.
Let's be clear. By most measures, Nortel actually had a blowout
quarter. Its revenues ballooned 42 percent, to $7.3 billion, and
its operating income (which is what analysts look at) grew a
stunning 83 percent, to $574 million, slightly beating estimates.
What shook the markets, believe it or not, was that revenues for
its optical equipment business grew only 90 percent, year
over year. Normally, that would be a bull market sign. Except that
in the previous quarter, that business grew 150 percent, year over
year. And compared with the second quarter, the same optical
revenues actually declined slightly. This slowdown was completely
unexpected because optical networking was supposed to be immune to
the weakness in the rest of the tech sector. Demand for bandwidth
is limitless, right? And optical networking is the way to go. So
what happened?
Well, for one thing, when a stock is trading at 85 times 2000
earnings estimates, there is no room for a slowdown. Even at $45,
the stock is still trading at about 60 times earnings. According to
Merrill Lynch, its long-term earnings growth rate is estimated to
be 30 percent over the next several years. So investors are still
paying twice that growth rate (one investing rule of thumb is that
you want your P/E ratio to match your earnings growth rate).
The reason for the slowdown is that large Nortel customers who are
building out next-generation optical networks, such as AT&T and
Williams Communications, are scaling back on their ordering
activity. The conventional wisdom on Wall Street right now is that,
earlier in the year, carrier customers such as these, ordered too
much -- perhaps as a hedge against the risk that Nortel would not
be able to adequately ramp up production of this newfangled
equipment. But now that Nortel's manufacturing seems to be in good
shape, they've decided to work their way through the excess
inventory they're sitting on. If this is the case, and demand for
bandwidth is still soaring, then Nortel is merely going through a
short-term inventory correction, and its optical business should be
back to its old growth rates in no time. Investors are being
presented with a rare opportunity to buy the leading optical
equipment company in the world at a rock-bottom price.
As tempting as it is to believe that, there is also a less rosy
scenario that could play out. Suppose that instead of this being a
short-term lull, more carriers decide to cut back on expenditures
for optical networking equipment and put the brakes on how fast
they build out their next-generation networks. They wouldn't halt
their projects altogether, just slow the speedometer from 170 miles
per hour to, say, 80. They may decide to do this despite the fact
that bandwidth is all the rage, and that the broadband future is
right around the corner.
The truth is that the capital markets have been financing the
building of all of these new optical networks by pouring billions
of dollars into any stock that could be considered an optical play.
Even when every other tech sector was taking a thrashing over the
past few months, optical stocks could do no wrong. This sent a
signal that the market would reward all things optical, giving
carriers the courage to keep ordering more equipment and upgrading
their networks at breakneck speed. Their spending was fueled, in
effect, by the bull market in optical stocks. But those magical
optical valuations failed to rub off on any of the carriers who
were buying equipment, and some of them decided to scale back. And
now that those valuations have been punctured, the carriers have
one less reason to continue to rush along with their optical buying
spree. Maybe Wall Street won't reward them for their ambitious
bandwidth-building projects after all. Rather it may choose to
reward carriers who are more cost-conscious. So perhaps, for now,
the greater part of valor lies in restraint.
And if that's the case, then Nortel does indeed have a cockroach
problem. Because next quarter there may be even more carriers
who've decided to slow their spending. And then the cockroaches
will really come out, and not just for Nortel.
Take the Poll: Do you think Nortel's stock drop is the beginning of
the end? Vote now!
ecompany.com
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Future Boy Erick Schonfeld at eCompany's upcoming conference in San
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