Optical/IP Networks

Light Dims for Optical Stocks

Friday was not kind to optical stocks, which had been holding up better than most technology stocks during the slump in the markets.

After Thursday night's earnings reports from Sycamore Networks Inc. (http://www.sycamorenet.com/; Nasdaq: SCMR) and Ciena Corp. (http://www.ciena.com/; Nasdaq: CIEN)--in which both companies beat analyst estimates for profits and earnings (see Ciena Beats Numbers, Drops Hints and Sycamore Reports Q3 Results)--the reality of the sky-high valuations in these stocks seemed to hit home. Investors fled en masse.

Sycamore shares lost $11.31 to close at $80.94, a loss of 12.26 percent. Ciena lost $20.81, or 15.16 percent, to close at $116.50 . Newly minted New Focus Inc. (http://www.newfocus.com/; Nasdaq: NUFO), which was offered on Thursday at $20 a share and quickly rose to $51, lost $2.00 on Friday to close at $49.

Things weren't much better for the leaders in the networking sector. For example, Nortel Networks Corp.(http://www.nortelnetworks.com/; NYSE: NT) closed down $3.94 to $52.50 and Cisco Systems Inc. (http://www.cisco.com/; Nasdaq: CSCO) dropped $1.94 to $53.94.

Expect more volatility and weakness in the coming months. The recent correction has given investors reason to reconsider the high prices of stocks in the technology sector. With newer optical companies going public, investors focusing on the sector will have more options and are likely to reconsider the multibillion-dollar valuations they are paying for these emerging players.

Some analysts have noted the current crop of networking stocks and optical players in particular have been very highly valued.

For example, in a May 1 report on Sycamore, Brean Murray Inc. (http://www.bmur.com/) analysts Gina Sockolow and Benjamin Kadlec noted the company's stock is trading at 45 times their current 2001 per-share revenue estimates. Sycamore's growth rate may begin slowing in 2001 unless the company expands the product line, which means it is "selling at a premium to that of its peers, who have a higher earnings growth potential," said the report. The report also noted that Sycamore is threatened by arriving players in the edge switching market.

--Scott Raynovich, excecutive editor,Light Reading http://www.lightreading.com

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