8/10/98 Forbes. Nice article. Recommends buying ASND
Excerpt: "Ascend is the other stock to hold. The recent deal with
Stratus is a second-tier answer to Cisco's relationship with Hewlett Packard, but Ascend has the only other credible set of IP traffic gear aside from Cisco for enterprises, Internet service providers, and telcos."
forbes.com
Investing for the age of plenty: What's the best way to take on the
technology world as an investor? Think one word: networks
By Jeffrey S. Young
Stocks may rise and fall, fads will come and go, but there's one thing you can count on as an
investor in technology: change and lots of it. The crucial issue for investors in the tech sector
arena is to try and see where the change is leading, and then invest in companies that are
particularly well positioned to take advantage of it. Or better yet, to find a pundit whose opinions
you respect, and a mutual fund that is following the same path, and invest with them.
No matter how smart a technology predictor you are, to master change correctly for your own
account requires an enormous amount of work. In this world of online brokerages, E-mail and
pager alarms, and instantaneous news dissemination via the web, the effort required to actively
manage your own money is prodigious. It helps if you have a job that requires you to stay on top
of every new development in the telecommunications and computing businesses. For a select
few, this is a challenge worth the investment.
Is there an easier way? Can you stay on top of the technology waves without being slavish in
your attention to the daily vicissitudes of every company you invest in? Are there mutual funds
that don't just try to emulate the indexes, but which are actually taking somewhat risky positions
and turning them into profits?
The effort required to actively manage your own money is prodigious.
In conjunction with today's publication of Forbes' annual mutual fund guide, the Digital Tool first
set out to see if there were specific funds that invested in recommendations from leading
technology analysts like George Gilder or Peter Drucker. Surprisingly, there don't appear to be
any of these, although a new pundit, Canadian author and consultant Don Tapscott, is about to
launch something along these lines. (See "Changing market realities.")
The next best thing to depending on someone else's research and expertise is to figure out
yourself what companies are making strong moves into the future, then look for mutual funds that
are already invested heavily in these areas. This way you do half the work--figuring out the
companies you like--but let the money managers move in and out of positions in the stock.
We looked at several major trends that are likely to shape the business marketplace in the
coming year, and to identify those companies with the best chance of profiting from the
innovations. Then, armed with that market intelligence, we searched through the Morningstar
tables of mutual fund holdings, looking for those funds that had big positions in our leading edge
companies. The results, in the accompanying table, provide one idiosyncratic view of the funds
that a savvy technology investor would probably want to think about adding to a portfolio.
Remember when you choose a fund to look closely at the manager's tenure and track record.
Also, pay attention to the fund's expense ratio, as well as to its turnover ratio--to determine
whether the manager is a trader or a long-term buyer. In addition to the eight funds listed in the
table, there are at least another 45 technology funds to consider.
After software and PCs, what comes next: Networking
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continued from "Investing for the age of plenty"
The players
The exponential growth of the network has huge implications. No longer is the microprocessor
the crucial engine for the digital revolution. That was the eighties. The nineties were the age of
Windows, and Microsoft. But the next century belongs to the network operating
environment--both hardware and software, from routers and switches to enhanced web pages
and virtual private networks--that is the engine of growth in the next decade. This includes
everything it takes to run the Internet, and LANs in every business around the world (and in
many homes ultimately, too), as well as voice dial tone and video distribution.
Don't succumb to the rational belief that there is an end in sight to the mad exuberance for the
networking business or for the Internet. There'll be market corrections, and first-tier Internet
companies, winners now, will later lose to waves of better suppliers of information (portals) and
retailers of goods (commerce sites). But the network market is vast, and characterized by the
paradox of a lack of scarcity--perhaps one of the first times when no scarce raw materials were
required for so huge a marketplace. Better yet, it is fueled by the power of 2--the doubling of
capacity, bandwidth, processor speed, memory, etc.--which produces enormous increases in
opportunity in just a few generations.
Intel will find itself under increasing pressure as microprocessors proliferate, and prices keep
falling. Already some advanced Microsoft products work best on AMD microprocessors.
Furthermore, the company must negotiate a new chip introduction--the Merced--at the 64-bit
end of its product line, and it has been delayed. On the other hand, Cisco, for all the run-up so
far of its stock, and its forthcoming split, is still the stock to own, and in a big way. Any fund that
can, should be heavily invested in it. Ascend is the other stock to hold. The recent deal with
Stratus is a second-tier answer to Cisco's relationship with Hewlett Packard, but Ascend has
the only other credible set of IP traffic gear aside from Cisco for enterprises, Internet service
providers, and telcos.
Look who's buying now
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continued from "Investing for the age of plenty"
Broadband revolution
On the hardware side of networking, Xylan is making a good run in LAN switches--while
3Com struggles to get traction, and Cabletron bumbles the advantage of its direct sales
structure.
In the IP carrier equipment market, look at Nortel, which bought Bay for a toehold in the market
and has also bought a very strong cable modem operation in the bargain. This client-side market
for fast devices--cable modems and digital subscriber line equipment--hides a deeper
opportunity. A user who today goes online using an ordinary modem at 19 kbps will be able to
do so in the near future using DSL gear running at a couple of megabits a second, representing a
100x increase in bandwidth. And that's just the beginning, because once the neighbor sees what
you can get at those bandwidths, he'll have to have it too. The bandwidth required in the
infrastructure--the "infranet" or back haul IP-based data network--is going to be startling once
the consumer broadband revolution gets rolling.
The only technology that appears capable of handling a bandwidth explosion is fiber optics. Not
the old world of SONET, which is the protocol used to run the current rings of fiber cable, but a
whole new world of IP traffic directly connected via an optical interface out the back of the
biggest routers. There's no role in that vision for the telcos, who get cut out of the loop right
away. So no RBOCs in our mutual fund.
Bandwidths are going to be startling once the consumer broadband revolution gets
rolling.
Supplying fiber capacity is a play that Tellabs can make, as the company is already deep into the
telecommunications business with traffic management systems of all kinds for service providers,
and now it has added optical pioneer Ciena to its armory. The combination will make a strong
play in coming years for the carrier interconnect and cross connect market as telcos and service
providers upgrade existing fibers to carry more data. Two other companies with strong optical
technology are British Telecom, and Lucent, both of which are deep into the wave division
multiplexing (WDM--a way to expand the capacity of existing fiber channels by 10s, to 100s of
times) movement as well.
But Lucent, for all its breadth, has little experience selling IP gear of any kind, its recent
multi-million dollar ad campaign notwithstanding. [Another strong argument for an ASND purchase.] In the short term, Newbridge's Vienna
Systems division has a very potent market coalescing in circuit-to IP gear that provides the
interconnection between the old and new worlds of telecomm. The problem with this company is
that the parent is in the old, low growth, complicated telco dominated ATM market, while its
newer operation simply digitizes voice calls to IP and blasts them across an IP interface. While
the former sounds better, the dumb IP world is where the growth will be. More risky plays here
include Uniphase, Ortel, and SDL, all of which supply differing parts of the WDM equation in
silicon and systems. But the real win is going to be direct IP to optical fiber. This would allow a
big customer to spike directly into one of the new fiber channels that are being installed all across
the country, by everyone from new breed telcos to slumbering giant natural gas utilities at
unprecedented rates. Who'll be the leader in this? Remember Cisco?
But there is so much capacity and bandwidth required for even 10% of the American population
to have full voice, video and data service that, essentially, anyone in the fiber market has a shot at
glory. This is how we are all going to get high speed telecommunications services in the next five
years. What we do with it is another matter. Someone will find a way to sell a service
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continued from "Investing for the age of plenty"
Data delivery
Qwest is lighting its fiber with up to 80 gigabits per second of raw data transport per strand. The
idea of delivering a completely new, alternate, new world, telelphone network is shared by Level
3, and a host of others. These guys are betting the farm on IP. Qwest is packing the equivalent of
a million voice telephone calls on each fiber pair, and each fiber optic cable carries an average of
48 pairs of fibers. With all this capacity, Qwest is selling unimaginable amounts of raw data
already. The loser here? WorldCom/MCI, which thinks that by using WDM it can keep dialing
up the capacity of its installed fiber routes. This won't make it when the company down the street
is laying cable with abandon, then practically giving it away and promising to lower prices even
further the more bandwidth you consume, all in order to find a future payoff when capacity really
soars. Another problem for Worldcom: Too much debt makes a company cautious when it
comes to capital spending. Profligate spending--to handle the coming tsunami of IP traffic--is all
that can save a network service provider.
Here's another speculative call: AT&T. Buying TCI made absolutely no sense, except if you
think of the cable spigot in the home as the first beachhead in the delivery of full-service voice,
video and data to the rest of us. From this angle it is an inspired deal. And since there was no
way to break the telco's lock on the local loop, it should end up looking brilliant. So is the
opportunity for Sprint, which has already jettisoned its old optical fiber SONET gear, in favor of
a direct IP to optical network.
Cyber-retailing
This is the final piece of the technology investor's mantra. Services will proliferate to take
advantage of the technological developments that are being driven by the web. Some of these are
search engines, comparison shopping networks, and news and information sources, all enabled in
new and intriguing ways by the Internet and its underlying engines of IP. However, deciding
whether Amazon.com can make a go of its ambitions to outgrow books and music is hard to
predict. In the cyber-retail space, technology, speed to market and originality may soon be much
less important than advertising, merchandising and creating a buzz about the brand. Almost
anything on the web can be quickly copied. This makes existing brand names valuable, but by no
means unassailable. But what will work is still unknowable, and a constantly moving target as
well.
The service providers who are going to succeed have to rewrite the rules. In rewriting them, new
businesses emerge. The only thing constant is change.
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See also:
Changing market realities
Living with the web.
This story, published by Forbes Digital Tool (www.forbes.com) on August 10, 1998, was
brought to you by Digex.
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