Components Still in Play, Analyst Says
"We're at the vacuum-tube stage of the market," said Charlie Willhoit, vice president and analyst for J.P. Morgan & Co. (Nasdaq: JPM), speaking to an audience of optical-networking entrepreneurs and market followers.
Recent venture capital activity appears to support Willhoit's thesis. In deals this week alone, components vendor Agility Communications Inc. landed $70 million in funding; Onex Communications, a communications chip specialist, got $20 million; and iPhotonics, an optical components manufacturing specialist, banked $29 million.
Investment banking interest certainly appears to be heating up in the components space, as well. Although Wall Street has been tough on technology stocks of late, optical components plays have been the leading names among IPOs. For example, the most recent components IPO, Oplink Communications (Nasdaq: OPLK), launched last week and is up nearly 20 percent from its offering price of $18, despite Nasdaq's dive.
Willhoit said optical concerns shouldn't be compared to the frothier firms that are getting whacked in the dotcom shakeout.
"There's absolutely no comparison," said Willhoit, who tracks communications components for Morgan. "There are real barriers to entry in the optical market -- companies need to have a bunch of PhDs just to get an idea, much less to get the technology working. There is real demand for real products, which produce real revenue, really fast."
Willhoit singled out the components space as the next fertile ground for optical investments, claiming that systems vendors were snapping up any and all available working component products. "If it's made of cement but runs OC48 at the right price point, they'll put it in a box," he joked.
More seriously, Willhoit said that system vendors are going to be under pressure to reduce the overall size of their packages even as they expand functionality, leading them to rely more heavily on the component and subsystem manufacturers for innovation. For both investors and entrepreneurs looking for new ideas, Willhoit provided a short list of new opportunities in the optical components space. They included:
· "Tunable anything" -- specifically, next-generation optical filters
· "Pure-play packaging" -- the art of packaging either just optical modules or both optics and electronics onto a single substrate
· Manufacturing -- both contract manufacturing of optical devices and automation processes for building components
· "Anything with physicists and engineers working together" -- As optical devices move into the 40-Gbit/s range, Willhoit said, a combination of physics and engineering smarts is going to be necessary just to make things work
"At those speeds, electronics and optics need to converge, just to get a signal out of the box," he said.
Willhoit predicted that the market for optical components could get a big boost next spring, when he expects Lucent Technologies Inc. (NYSE: LU) to finally complete the spinoff of its micro-electronics division. "Companies like Lucent Microelectronics and Agilent Technologies Inc. (NYSE: A) could really make some big noise, if they can get out of their own way," he said.
-- Paul Kapustka, Silicon Valley bureau chief, Light Reading http://www.lightreading.com