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Bubble Time?

9:15 AM -- As I'm typing this on Thursday, JDSU (Nasdaq: JDSU; Toronto: JDU) and Opnext Inc. (Nasdaq: OPXT) appear to have beat expectations with their earnings reports. Both stocks are up more than 15 percent in after-hours trading.

Both companies also gave pretty sunny projections for the current quarter: Table 1: Revenue Guidance
Company Expected
March 2011
Forecast
Actual
March 2011
Forecast
JDSU $420.8M $440M-$460M
Opnext $92.7M $97M-$102M
Source: Thomson; company reports




But what if it's all about to end? Remember that last year, Ed Zabistky of ACI Research was warning of a bubble forming in semiconductors and optical components. (See Chips Start the Downslide.)

I don't think he's being sensationalist. If anything, he's describing the normal cycle of this business. Shortages cause extra ordering; when shortages end, big inventories linger, putting a drag on sales.

Zabitsky isn't just going on gut feel. In multiple reports, he's been pointing out that Verizon Communications Inc. (NYSE: VZ) has finished an optical buildout. That's a chunk of demand that won't be recurring. He also considers China to have been undergoing a de facto stimulus plan -- meaning telecom demand, which is inherently strong, was propped up to look even stronger.

The trick to all this, of course, is to predict when the music stops. It wasn't this quarter. But I think Zabitsy's reasoning is sound. Buying is being spurred by shortages, and no matter how careful the industry claims to be, there's usually an inventory jolt at the end of the cycle.

— Craig Matsumoto, West Coast Editor, Light Reading

Vishnu Goel 12/5/2012 | 5:13:50 PM
re: Bubble Time?

Semiconductor business has always followed the Boom and Bust cycle and that is where the industry tried to monitor Book-to-Bill Ratio to smoothen out the undulatory periods.The Optical Components going into Network Infrastructure have in the past buried many a fiber companies deep under the ground during Excess Capacity buildup while the demand collapsed.Optical Components industry needs both Consolidation and Innovation so that telecom pipes become more intelligent and growth happens for operators with moderate or no Capex escalation.JDSU has to clearly see where revenue growth is happening and where profit margins are coming from,in their businesses.Vishnu Goel T&M +919810101238

Pete Baldwin 12/5/2012 | 5:13:45 PM
re: Bubble Time?

Jeez, what a morning these stocks had.  JDSU up 23%, Opnext up 29%, Finisar up 11%... Neophotonics (talk about great timing for that IPO) up 21%.


It's a good day to be Optical.

Pete Baldwin 12/5/2012 | 5:13:45 PM
re: Bubble Time?

Thanks, Vishnu. The chip industry does seem to be aware of its cycles -- they can't always avoid them, but at least they've accepted them and can sometimes anticipate them.


When they say the cycles have stopped, that's when you know it's about to hit the fan.  :)

Pete Baldwin 12/5/2012 | 5:10:48 PM
re: Bubble Time?

The flip side, and maybe Zabitsky's vindication: Finisar just reported Q3, forecasting a weak fiscal Q4 due to, among other things, customers eating down their inventory. Stock's down 35% after hours.

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