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Financial

Stock Shocks

Redback Networks Inc.
    Nov. 21, 2005, price: $12.75
    May 19, 2006, price: $23.00
    Change: +68%
Redback, quite simply, has been on a rampage. We're proud to say it won the Leading Light for best investment potential, and it has lived up to the award by posting the best performance of our finalists. (See LR Names 2005 Leading Lights Winners)

Why'd Redback go so green? It relates to three things: (1) Redback has hot new edge routing products geared specifically to the IPTV market; (2) It’s landing many new edge-routing deals, boosting sales, and stealing market share from Juniper; (3) It's a prime acquisition candidate.

Where's it all headed? If Juniper doesn't fix its IPTV and B-RAS story, well then, it could end up having to buy Redback. That is, if Alcatel, which owns a stake, even lets it.

The thing that makes us nervous about Redback is that it's the kind of stock that often moves up or down 5 percent on any given day. Redback isn’t cheap anymore, so it's definitely been profitable if you got in last fall. With a 1.2 billion market capitalization and a run rate of about $250 million, it's time to wait for a pullback if you are thinking of wading in.

There you have it – five stocks, four of which have done well.

What's next for the telecom market in general?

As stated at the outset, we are not expecting good things from the stock market from here until after October. The only question is: How much downside is there for telecom?

As I outlined in late 2004, I expected the telecom market to be powered primarily in one thing and one thing only: a return to growth in capital spending, with a possible acceleration in investment in access and fiber technologies. (See Telecom: The Next Generation.) Since then, the market has performed as if following the script. Capital spending has returned to a steady 10 percent to 15 percent annual growth rate. In fact, you could even argue that new initiatives such as IPTV and Fiber to the Whatever (FTTx) have exceeded expectations, and investment initiatives in these technologies could accelerate.

So what now? Global markets appear to be weakening, so a broader sell-off in stocks could pressure telecom service and equipment holdings. With some of these stocks showing profits of 20 percent and higher, there’s no reason to get greedy – take some profit if you have some. Yes, I am advising you to sell some in May and go away.

But I think there will be a time to come back, not in the next decade, but this year. The telecom market – and telecom equipment companies – should hold up better than the general markets, and here’s why: The market is rational. The telecom market crashed harder than any others back in 2000 and 2001. You don't usually see the same sector crash twice in a decade. Investors have been chastened. There are new sectors to crash, this time. There is not a lot of crazy money running around telco these days.

I also believe that the large telecom service providers are going to continue to invest in next-generation technology. They have no choice. They spent much of the earlier part of the decade cutting back and buckling down. In the past, telecom equipment spending has roughly followed a ten-year cycle. As we move closer to 2010, manufacturers are going to have to upgrade their plants, given that the last capital spending boom started tapering off in 2000. New services are being deployed, such as IPTV and wireless broadband, that will need a whole new range of equipment.

I think we've had some hints of this in the most recent sell-off. Stocks such as NeuStar and Redback were barely even dented. In fact, Redback has been up in recent days. Any weakness between now and the fall will be a buying opportunity. (See Video in Demand and Telecom Global Warming.)

— R. Scott Raynovich, Editor in Chief, Light Reading

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digits 12/5/2012 | 3:53:12 AM
re: Stock Shocks you mean the stock, rather than the company... :-)
Scott Raynovich 12/5/2012 | 3:53:12 AM
re: Stock Shocks Hmmm, not many postings out there... I guess nobody bought Redback.
Scott Raynovich 12/5/2012 | 3:53:11 AM
re: Stock Shocks both
Peter Heywood 12/5/2012 | 3:53:01 AM
re: Stock Shocks What about the longer term future for the telecom industry, for investors who prefer to bet on fundamentals rather than temporary swings in market sentiment?

Personally, I'm pretty gloomy about the likely long term fortunes of most of the companies on our list. They're facing:

- long term reduction in size of the telecom infrastructure market, as a result of convergence.

- standardization and commoditization of telecom hardware (ATCA) and software (IMS), which will open markets to much stronger competition

- arrival of new competitors from China, India, Russia

On top of all this, I don't really see telecom operators being able to transform themselves in service supermarkets. So they're not going to be the ones placing orders in the growth market of the future - network enabled applications.





alchemy 12/5/2012 | 3:53:00 AM
re: Stock Shocks
- long term reduction in size of the telecom infrastructure market, as a result of convergence.

- standardization and commoditization of telecom hardware (ATCA) and software (IMS), which will open markets to much stronger competition
- arrival of new competitors from China, India, Russia


I disagree. Prior to 1990, we had convergence since everything was circuit switched. What's the difference between a 1200 baud modem in 1982 and a T1 PseudoWire box in 2005? (other than perceived market size). There are still lots of market opportunities for innovative companies.

The one thing about standardization (ATCA and IMS) is that those standards look laughably archaic fifteen years later. How do VME, MVIP, and AIN look today?

Personally, I'm not all that worried about competition from China, India, and Russia. I'm more worried about the poor quality of the new entrants to the US work force. I don't see US-born new grads who are willing to work hard. Too much wealth seems to have created a sense of entitlement.

On top of all this, I don't really see telecom operators being able to transform themselves in service supermarkets. So they're not going to be the ones placing orders in the growth market of the future - network enabled applications.

Who says service supermarkets have to come from the telecom operators? I see Cable eating their lunch in the core quadruple play business (phone, cell phone/mobile devices, internet, television) as the "new" telecom operators. I see the Googles and eBays of the world riding on top of that infrastructure. I also hear endless speculation that Google will buy RF spectrum and become their own teleocm operator.
very_objective_dude 12/5/2012 | 3:52:56 AM
re: Stock Shocks Just to chime in my 2 cents. Google buying RF spectrum would be a bad move. Too much diversification into customers' products and services will just water down the whole business focus. Basically, you are not this nor that, you are half competitor and half provider. You can't fool your customers.

If anyone remembers Excite at all, it is no longer around. Excite bought @Home to diversify. Excite even was on TV showing how cool it was to work there....... similar to Google....??? So, when a company is riding the rising tide, it has to know what to do, not just do anything and expect a good ROI.
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