Hi couldawoulda,
The appreciation is mutual. :)
JDSU, SDLI etc. would be placed on the f/o food chain where?
With a glancing regard to the OSI model, I present the 7 layer OIS, the Optical Industry Schema. Taa daa.........
1)End users: You, me and everyone else with straw into the cloud, Wilshire 5000 firms and NFIB members, among others.
2)Service provider layer: typically ISPs, CLECs, resellers.
3)Carriers: From RBOCs to WCOM, ENE, WCG all the way to the newest like PF.Net.
4)Switch and Router Builders: LU, NT, ALA, ERICY, JNPR, SCMR etc.
5)Component and subassembly mfrs.: Here's where JDSDL fits in.
6)Test&Measure and basic equipment: NEWP, EXFO, ILX Lighwave, EMKR, HPW, etc.
7)Research Laboratories: National labs, universities, private R&D initiatives
Now as to your contention that Cramer has the list on its head, I'm not quite sure I follow your logic here. Real demand is only created by Layer 1, when the final analysis is made, with the exception that Layer 2-4 can temporarily create demand for Layer 5 companies, but only if they are building inventory, which is an expensive way to spend a corporation's treasury. Since Layer 2 firms are typically undercapitalized, there's scant evidence that they are stockpiling anything. At Layer 3, we have it on the word of NT that in fact, carriers are building inventory and have systems that can't be installed as fast as delivered because of a bottleneck, namely the lack of sufficient qualified field engineers. At Layer 4 there is good evidence of hoarding and disruptive inventory management practices.
You state: demand while sure to slow in the future, perhaps four to five years out, will remain robust for the time being. I will refer you to the Economist article mentioned upstream regarding the dearth of new money for telecom investments and corroborate it with this one on WCG:
lightreading.com
and surely you've heard the news on WCOM's announcement on CapEx for 2001. Now, WCOM may be a semi-dinosaur, but UUNet surely is not. The impact of WCOM's decision on the most advanced long-haul segment of their network is not clear at this time. More particulars are to be announced next week, according to Scott Sullivan, WCOM's CFO.
So, I think that you may be engaging in a bit of wishful thinking that it will be four or five years before things slow down. To my eye, the evidence is overwhelming that the carriers at Layer 3 are having their oxygen cut off by the bond market. Now.
How forward-looking do you want the markets to get? Sir, it matters not a wit what I might want. I wouldn't be so presumptuous. ;~) But historically, the stock market seems to lead Main Street by anywhere from 7-10 months. At least that's what the work of Jeremy Siegal has determined.
the argument is how many companies exist in the market place today that perform the same duties as a WCOM does, perhaps do it far more efficiently and will not see a similar need for spending cuts anytime soon? In brief, I can identify 360 Networks as being well funded through 2001, LVLT is similarly situated. GBLX has good financing in place at present, though I'm not sure how contingent things are there. Other carriers such as PCW, in Hong Kong seem to be in a very precarious situation. ENE seems OK.
So, it's not blanket doom and gloom, of course. It is merely that the telecom supertanker is gracefully slowing down, right now, and the stocks of the companies involved are reflecting the diminished expectations for the immediate and foreseeable future.
the market suddenly got spooked over the last few sessions thinking a spending slow down would happen in an instance and effect the earnings of these companies like JDSU today. Right, seems kind of childish doesn't it. After all, the WCG difficulties were made known in late June. The troubles in the capital markets didn't just happen overnight. But what seems to have occurred, and it took me by surprise, just like everyone else, was the singular inability of NT to maintain a consistent record of sequential growth in the optics sector. This is what I call the "tipping point" where Mr. Market finally had the understanding that all the other pieces indicating trouble in paradise weren't just so much background noise, but were actually the signal.
Furthermore, with rapidly expanding technology it wouldn't be unwarranted to think that the bigger businesses will survive the slow down through basic r&d which will effectively counteract the slow down altogether.
So let's question the ability of JDSDL to planarize and automate their production of AWGs and ask if maybe the likes of Lightwave Microsystems may be ahead in the game there. Also, one of the absolutely most fantastic display of herd behaviour you will ever witness in markets has just occured in the fiber optic component sector. I'm counting at least $1B of venture capital flowing into an absolute plethora of start-ups all gunning to get a piece of JDSU's business. That's a lot of competition in anyone's book. And most of that new product will be coming into the market just as CapEx spending is turning the corner. You don't have to have gotten past Econ 101 to realize that we are rapidly tipping over from a seller's market to a buyer's market at the component level. Prices will adjust, profits will be diminished, and stock prices will reflect a new reality. QED
I simply cannot foresee 9 quarters into the future, can you? My rule is that the future is unforeseeable beyond 6 quarters. Anything beyond that is blowing smoke, as RHK is with their projections of a $50B market in 2004 from today's level of less than $20B for FO devices.
They've had to make a series of assumptions on the growth rate of the Internet, the level of interest of the general public vs. the early adaptors like the denizens of SI, who are in a distinct minority of the population and will forever remain so. You see, most everybody who's on the Internet uses dial up modems. They're cheap, sorta reliable and ubiquitous. At least in North America. Over 94% of all Internet connections are done this way. And 90% of the people who use DUN are satisfied and won't trade up to a broadband connection if it is going to be a lot more expensive. And so now we get to the real heart of the matter is that no one on this thread, for as long as I've followed it has paid much attention at all to how much demand there is from Layer 1 of our cake. It's not at all clear to me that the explosion in uptake of Internet connectivity is going to continue at its present pace. Project the present rate out too far and you end up with more connections than there are human beings within the decade.
Do the math and break up JDSU's growth provided by the guidance given by the management this evening and compare that with the market close p/e on this stock. In 1972, a good stock could be bought for about a P/E of 12. In 1974, a good stock couldn't be sold for a P/E of 4. As regards the guidance, I'm convinced that if you go back into the literature you'll find instance of component vendors in other industries who were just as upbeat as Jozef Strauss and his staff. And they had no reason not to think that things were great. But what they see are their immediate orders and their guidance from the Layer 4 guys. And what I'm trying to tell you, is that they don't really know what is coming. Because what's going on is that we are in the midst of a dramatic over-capitalization of the FO sector and not everyone is going to make it. And the survivors are not going to be unbowed by the punishment that the markets will inflict for non-performance. Which is not to say that JDSU is not a great company, for surely it is. It is simply a matter in my mind of trying to establish a reasonable price for a company that is facing, within the 6 quarter time horizon I adhere to, slackening demand and increased competitive threats. When I factor these things in, JDSU still seems to be priced on hopes and dreams and not the reality I clearly see in the future.
You'll see what I mean. Actually, I understand what you're getting at, but I respectfully nonconcur with your conclusion. And that's what makes a market. :)
Best, Ray |
