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Technology Stocks : Nortel Networks (NT) -- Ignore unavailable to you. Want to Upgrade?

To: Apex who wrote (7903)	10/30/2000 1:17:42 AM
From: CIMA	Read Replies (2) \| Respond to of 14638

MARKET INSIGHT from the NY TImes October 29, 2000 HERE'S a puzzler: If you see bear tracks in what has long been a very friendly part of the forest, what do you do? Last week, many investors in fiber optic cable and similar companies didn't appear to think the question was that tough to answer — they bailed out. Star stocks like Nortel Networks, Ciena, JDS Uniphase and Corning were blasted on worries, prompted by Nortel's third-quarter revenue numbers, that demand was slowing. Some slowing. Investors chose to overlook or ignore Nortel's guidance for 2001, which said it expected operating earnings to grow 30 percent to 40 percent. And on Thursday, JDS Uniphase said it expected sales to increase 115 percent to 120 percent next year. Gregory Geiling, an analyst at J. P. Morgan Securities, took time last week to put these developments in perspective. Following are excerpts from the conversation: Q. Lucent Technologies, one of Nortel's competitors, has been stumbling all year, and its stock has been battered. Was Nortel's earnings release really that bad? Or were folks just looking for an excuse to sell a very expensive stock? A. Nortel had a short-term problem, one that said the optical marketplace, which has been a very high growth area for the last two years, will have some blemishes along the way. It was a wake-up call to investors. But the way the stocks moved last week is more a concern about how they were valued than it was about the future for the industry. Q. Even with the correction we saw last week, most of these stocks are still trading at stunningly high valuations. Is it possible to determine a proper valuation for businesses that are growing this fast? A. That is the $64,000 question. We have never seen valuations like these, but we have never seen the growth we are seeing either. Take Nortel. The company has $30 billion in overall revenues, and last week said it will not only grow at a 40 percent rate next year, but will expand its margins. Now, growth in fiber optics will slow next year, due in large part to the law of large numbers. This is now a $25 billion industry which we see growing by 50 percent to 60 percent next year. Q. Are you worried that spending in this area by big telephone companies is slowing down and will slow further next year? A. I don't buy the theory. Traffic growth, particularly Internet traffic growth, is not slowing down. In order for service providers to stay aggressive and stay in business, they need to have the equipment to keep up with the rise in traffic. It's true that the equity valuations of the telecom services stocks are beaten up, like Worldcom and AT&T. But even though their stock prices are very low right now, their cash flows are fine, and they need to spend. And 90 percent of the spending on fiber optics is done by the top 10 telecom service companies. Also, the use of light to transmit information will be the main source of how information will move for at least the next decade, if not longer. So far, we haven't found anything else that can move things faster than the speed of light. Q. If investors don't mind spending what still seems like a lot of money to establish a presence in this area, which stocks should they consider buying? A. Nortel Networks is by far the highest- quality name in fiber optics. To manage the growth they have with only one hiccup is amazing. Beyond Nortel, you look for companies with good technology and a very good management team. The companies that fit in there are Ciena, Corvis and Sycamore Networks. Outside of Nortel, Ciena has the longest history as an optical stock. Q. What about the components makers? A. JDS Uniphase and Corning are the two best holdings. They both have a very strong list of customers. Q. Lucent Technologies has seen its stock slide about 70 percent this year and is now trading at a multiple to its earnings that most folks can understand. Does it have a future in this area? A. Lucent has great internal technology but has not done a great job of bringing it to market. I think they can turn it around, but it may take awhile. Q. What about Cisco Systems? They have been spending a lot of money in fiber optics. A. Cisco is the big wild card. It is a company with one of the best managements in the world, it has a very strong presence in Internet routers, and they are just now getting into fiber optics. If they are successful in the strategy they are employing right now, in the next three years they will be one of the three biggest optics players. I don't think anyone can count them out. They have done a very good job of starting to build market share.