Supercomm Sobriety

ATLANTA--Excitement usually breeds frothiness, and frothiness breeds collapse, and then collapse breeds opportunity.

So what phase are we in in the bandwidth revolution? Somewhere in between frothiness and opportunity.

At a trade show such as Supercomm, it might be best to take a casual, aloof view of the market when looking at potential telecomm investment ideas. Investment bankers and VCs are crawling everywhere, but cynicism runs high. It is hard to be earnest and ahead of the curve in a market that has been so heavily exploited that a company such as ONI Systems Inc. http://www.oni.com (Nasdaq: ONIS), a company that reported a tad over $3 million in its first-quarter revenues, can go public at a $10 billion valuation. And then we have Sirocco Systems, a company with a product that is between 6 months to 9 months away from creating revenue, being bought for $2.9 billion by Sycamore Networks Inc.http://www.sycamorenet.com (Nasdaq: SCMR).

As one VC put it, "There doesn't seem to be much left." There is so much energy and money flowing into the optical market, you have to ignore the hype and look off the beaten track.

Even Judy Estrin, former CTO of Cisco Systems, Inc., was taken aback by our idea of finding good deals in the market. She declined to give stock ideas, citing her board positions at Sun Microsystems, Disney, and Federal Express, but she did indicate that she thought much of the market was overvalued.

So where to investigate the new ideas? Maybe it's time to fall back on the Peter Lynch method: look at what you have personal affection for or follow companies that people in the industry talk about.

How about Sprint PCS? As far as I can see, many of the people I know have traded in their AT&T http://www.attws.com (NYSE: AWE) phones for the Sprint PCS http://www.sprintpcs.com (NYSE: PCS) service. What service did your buddy subscribe to? My personal experience is that the Sprint coverage is better and the connection quality superior to what I was getting with AT&T.

Then there are companies such as Somera Communications Inc. http://www.somera.com (Nasdaq: SMRA). Here's an IPO flying under the radar. After raising $114 million in an IPO last year and subsequently rising as high as $20 per share, the stock has fallen into the $12 range; it's profitable and trading at a price/earnings ratio in the mid-30s, according to Stockpoint http://www.stockpoint.com. It may not have the attention or glamour of a Sycamore Networks Inc. or a Juniper Networks Inc. http://www.juniper.net (Nasdaq: JNPR), because it's in the mundane business of reselling both new and refurbished telecom equipment from the likes of Nortel Networks Inc. http://www.nortel.com (NYSE: NT) and Fujitsu. But it's a cheap way to play the optical market, with last year's revenues increasing 73 percent over the prior year. Why buy a flashy high-growth startup at high multiples when you can play the profitable reseller?

Then there are the ideas you get from investment fanatics in the industry. For exmple, Ernie Ianace, director of sales for the Americas for Intelect Network Technologies, a division of Intelect Communications http://www.intelectcom.com (Nasdaq: ICOM) says he likes Efficient Networks http://www.efficient.com (Nasdaq: EFNT). He sees the company taking market share "from everyone" in the DSL customer premises equipment (CPE) market. Its stock collapsed from $180 to the $60s in the correction, and it's now valued at $3.4 billion--making it a member of our sub-$5 billion club of companies with over 100 percent revenue growth.

It's all anecdotal, and not very scientific. We barely even cracked the spreadsheet. But in days like these, it's time to dabble and scan the crowd, investigating some more eccentric ideas while awaiting the next tectonic shift in the crowd.

--R. Scott Raynovich, Executive Editor, Light Reading (http://www.efficient.com)
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