Related stuff with a mention of COMPAQ.
April 29, 1999
SMARTMONEY DAILY SCREEN: The New Internet Enablers
By ALEC APPELBAUM
Dow Jones Newswires
Smartmoney.com
NEW YORK (Dow Jones)--Now that big phone companies are investing in Internet technology, are you looking for the stock that fuses Internet growth with phone-company stability? Let us know when you find it.
The truth is, the technology isn't quite there yet. For the next couple of years, the hot companies will be those who create and foster new uses for the Internet for consumers, and the big phone and cable companies who control the access.
AT&T (T), Sprint (FON) and other big players are rushing to converge voice, data and video services on networks with Internet protocols, in the hope that those protocols will enable them to sell more services at lower costs.
But no phone company, not even one that develops voice over cable wires, will broadly deploy IP systems for conversations until the technology becomes reliable.
To lasso Internet growth in the meantime, they'll push new products in data, e-mail and other online naturals. All along, the companies worth investing in will help the telcos build enthusiasm and brand loyalty for their new services. In today's screen, we found two stocks that can expand consumers' and businesses' uses for the Internet.
We went looking for tech companies whose current sales growth and earnings projections outpace their peers - and found two networking suppliers that work from different angles. Broadcom (BRCM) sells silicon to equipment providers for cable modems, set-top (cable) boxes, phone-line upgrades and office networks, while Comverse Technology (CMVT) stuffs Internet access into wireless phones and combines voice mail, e-mail and fax data into a single voice-mail box. We showcased both these stocks as undervalued in the past, and made Comverse a magazine pick in January 1997. That was 187% ago.
As these firms have started to realize their promise, they've obviously become a little richer. But both have new products and alliances that analysts say could add at least $10 to their stock prices this year.
Broadcom doesn't sell voice technology, but it is pursuing a kindred cause to the phone companies by trying to expand Internet use throughout homes. Sunday, it committed $316 million in stock to Epigram, a private firm that runs high-bandwidth communications over existing home-phone lines. Salomon Smith Barney analyst Clark Westmont describes this as a precursor to deep Internet penetration. First, he says,more homes will pick up second computers as PC prices plummet into the $300 range. (The International Data Corporation forecasts that the number of home offices with multiple PCs will grow from 7.8 million last year to 12.1 million in 2002.) Then using Epigram's technology with Broadcom's existing expertise, consumers with multiple PCs will be able to set up a high-speed network within their homes.
This still remains somewhat abstract. Preferred Capital Markets analyst Greg McLelland says computer manufacturers would have to bundle Epigram's solution (which plugs into a phone jack) for it to achieve broad sales. However, Tut Systems (TUTS), which makes a solution 10 times slower than Epigram's, already has deals with Compaq (CPQ) and chipmaker AMD (AMD), and it's licensed its technology to Epigram for future retail sales.
Meanwhile, Broadcom has a stable business in cable equipment. Merrill Lynch, an underwriter of Broadcom's 1998 stock offering, expects 5.5 million digital set-top boxes and 1.5 million cable modems to ship this year and calls Broadcom 'best positioned to benefit" from growth in this market. The set-top box can become "a gateway in the home for all kinds of enhanced services," argues Salomon's Westmont. Furthermore, McLelland says, the recent sale of rival silicon peddler Level One Communications to Intel (INTC) lessens the threat that Broadcom will lose market share in its core business this year. "I've been talking to customers who are not thrilled with the idea of buying from Intel," he says. The firm reported a blistering 137% year-over-year revenue growth last spring, and analysts say its stock price may ease a little as its growth comes in line with its industry. But Westmont sees the Epigram purchase bolstering the stock by "opening the envelope to new markets."
While Broadcom encourages homes and offices to devote more ports to the Internet, Comverse grows by helping phone companies use the Net for cheap remote communications. Ted Jackson, an analyst at U.S. Bancorp Piper Jaffray, who rates the stock a strong buy, has this example: A Comverse feature enables an office worker to send a simultaneous voice mail to 80 colleagues without tying up the public phone network by routing the message across an Internet-protocol network into a digitally identified voice-mail box. By selling services that let phone companies offer integrated voice, fax and email messaging, Comverse has built a customer base of around 280 carriers. As it continues to add services such as one-touch call return, says Jackson, it can keep growing revenues from existing customers.
Comverse also helps phone companies bring the Internet to the wireless market, where it draws 65% of its revenues. Last month it entered an alliance with phone maker Ericsson (ERICY) to install screens for e-mail and Web surfing into wireless phones. "The sense that we've got is that a lot of carriers are putting this ability into their bid requests from phone makers as a prerequisite," says Jackson. Still, because of the lack of a nationwide wireless standard in the U.S., Europe and Japan will serve as this technology's test market. In the meantime, Tim Luke of Lehman Brothers, which underwrote a Comverse offering, expects the stock to reach $75 or $80 a share in the next 12 months. "Investors are targeting companies that have the ability to beat estimates, and Comverse has shown that it can," says Luke.
Luke dismisses the competitive threat from Lucent's (LU) Octel division and says the company's performance should continue growing along with the messaging market: Jackson says that once 15% of the phones in a given metropolitan area have voice mail, adaptation will start to grow even faster. Comverse is trying to expand by developing technology that will make the Internet more rewarding for consumers to use and more plausible for phone and cable providers to sell. In any technical system, that's a marketing challenge. "In the carrier markets, everyone will offer converged networks and the differences will be in services," predicts Jackson. Who knows which phone company will win the marketing battle? But these two stocks give a pretty good sense of the weapons they'll use.
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