- Nov. 21, 2005, price: $12.75
May 19, 2006, price: $23.00
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