Compliments from Yahoo Board...Good Article mentions WSTL...
smartmoney.com
November 25, 1998
Can DSL Break Out of the Slow Lane?
By Joshua Albertson
UNTIL NOW, promises of a broadband revolution in
the world of copper telephone lines -- one that will
usher in lightning-fast Internet access and eliminate
data and voice bottlenecks -- have been largely
unfulfilled.
Despite years of buildup, homes with high-speed
Internet access via phone wires number only in the
thousands. And excepting the occasional misplaced
exuberance, investing in companies banking on this
thus-far chimerical revolution has been similarly
disheartening.
In fact, it's about as likely that you have made money
investing in companies that specialize in the telco
broadband solution, digital subscriber lines (DSL), in
1998 as it is that you are reading this from a
DSL-based Internet hookup.
Stock prices of DSL pure plays like Orckit (ORCTF),
Westell (WSTL) and Aware (AWRE) sagged through spring and summer and into
early fall. And
according to the Yankee Group, a telecommunications research outfit, only one in 50
homes is
even equipped to handle a DSL modem.
But several recent announcements have sparked renewed hope in the promise of DSL
for
consumers. First, in late October, there was the adoption by the International
Telecommunications
Union (ITU) of a standard asynchronous digital subscriber line (ADSL) technology
called G.Lite. The
standard, which provides for easy DSL installation and data transmission speeds
approximately 30
times greater than traditional dial-up access, is expected to spur greater DSL
deployment among
the regional Bells and other carriers.
Then, earlier this month, Compaq Computer (CPQ) announced that it would begin
selling
DSL-equipped personal computers directly to consumers. The company also said that
all of its PCs
would have broadband capabilities by 2000, a nod to the burgeoning need for faster,
more efficient
Internet access.
Finally, last week, MCI WorldCom (WCOM) CEO John Sidgmore announced that
his company
would roll out a national DSL service, UULink DSL, for consumer use on America
Online (AOL)
and Earthlink (ELNK).
It was a heady set of endorsements for a technology that has thus far trailed its
broadband rival, the
cable modem, in both deployment and publicity. Of course, this market has started and
stopped
before, and there are still doubters. "I've been bearish on ADSL for five years and so
far I've been
right," says SoundView Financial's Chandan Sarkar. But the list of believers seems to
be growing
as well.
Witness the stock price of Aware, the company whose intellectual property is behind
the new
G.Lite standard: Shares jumped 52% to 13 on the day of the ITU announcement and
have barely
slowed down since. At 19, the stock sits 300% above its October low. "When
[G.Lite] did get
standardized, the market took it as evidence that this thing was for real," says analyst
Charlie
Pluckhahn of Stephens.
According to Pluckhahn, who tracked the technology for several years on the buy side
before
initiating coverage on the sell side in 1997, there are two ways to play the DSL sector.
"One way is
to own Cisco (CSCO)," he says. "If you think about it, all DSL is is data networking
for the masses.
And if you believe in networking, what are you going to own?"
Pluckhahn applies similar reasoning to Nortel (NT) and Lucent (LU) on the telco side,
but he says
that there's still potential to make money on the small-cap DSL pure plays like Aware
and Orckit.
"You can buy the big caps, but then you want a little race car to go along with it," he
says.
And despite the stock's tremendous run, Pluckhahn still likes Aware, a thinly followed
stock with a
market capitalization of just $392 million. Essentially, Aware sells its intellectual
property to
companies that make chips for DSL modems. For each chip that uses Aware
technology, the
company gets a royalty. And with the ITU standards in place, the list of Aware-based
chipmakers is
growing. Analog Devices (ADI), Siemens (SMAWY) and Lucent Microelectronics,
Lucent's chip
division, are all Aware customers, and Cisco uses chips bearing Aware intellectual
property in its
DSL equipment.
Eventually, Pluckhahn thinks that the majority of the major equipment manufacturers --
namely
Lucent, Nortel and Cisco -- will use Aware-based chips. "When the dust settles six
months from
now, there's a pretty good chance that all three will be deploying Aware intellectual
property," he
says.
For that reason, Pluckhahn contends that he didn't even consider downgrading Aware
when it met
his price target of $18 earlier this week. The upside, he explains, is too great. Still, he
expects the
company to lose 13 cents per share in 1998 and earn only nine cents in 1999 and 24
cents by 2000
(after tax considerations). That means that the stock is currently trading at a triple-digit
multiple to
next year's estimates.
But Pluckhahn, who says his estimates will rise with each new contract, still isn't
flinching. "When
you look at what's happened in the past [when new technology has been introduced
into the phone
system], there have been extraordinary prices paid for these stocks," he says.
Still, questions remain about whether Wall Street will continue to pay for a small-cap
stock whose
earnings come primarily from royalties. "Wall Street historically has been skeptical of
royalty plays.
Wall Street likes products they can see, feel and touch," says Pluckhahn.
And the lofty valuation is keeping some pundits on the sidelines. Joel Achramowicz,
who tracks
Aware, Westell and Orckit for Preferred Capital Market, says Aware is too expensive
for his tastes.
He prefers Westell, which operates mostly on the equipment end of the market,
supplying carriers
with central office equipment to manage DSL transmission.
That company's stock has plummeted 57% in 1998 and investors have been slow to
jump in even in
the recent market upswing. And larger players in Westell's market, such as Alcatel
(ALA), have
made for a difficult pricing environment.
Achramowicz, who sets a price target of $8 on the $5.50 stock thinks that, ultimately,
Westell
might be bait for a larger player. "The company should be able to put themselves in a
position where
they could sell out to a larger company just entering the market," he says.
Similar sentiment has swirled around Orckit, the Israeli-based intellectual property
player. But the
company has managed to win several important contracts that should allow it to turn a
profit in
1999. Earlier this month, Lucent agreed to use Orckit technology in ADSL rollouts in
Europe, the
Middle East and Africa. Orckit has a similar arrangement with Fujitsu (FJTSY).
Like Aware, shares of Orckit have climbed considerably since the market bottomed in
early
October, but the stock still sits well off its 52-week high. Robert Goldman of
Josephthal anticipates
that heightened public awareness of the DSL market should lift the stock. "As the
company wins
more contracts, and DSL deployments become more prevalent, especially in the U.S.,
the multiple
should go up," he says. And Goldman adds that the company's operating margins will
improve
significantly when it releases its own chip set sometime early in 1999.
The caveat here is that none of these pure plays are for the risk-adverse. They have all
burned
investors before, and they can do it again. And with thin coverage on the Street and a
still-evolving
product set, it's hard to get a grip on future earnings.
But whether it arrives sooner or later, high-speed data transmission will make its way
into U.S.
homes. The Yankee Group's Bruce Leichtman estimates that seven million households
will
subscribe to some sort of broadband Internet service by 2002. He calls the battle
between cable
and phone lines for that service a "jump ball."
So, it may not be a revolution, but chances are that one of these DSL "race cars" is
going to
continue to speed ahead |
