WILL OPTICS PROVE ANOTHER DOTCOM BUBBLE?

THE collapse of the dotcom bubble has had one salutary impact on the psyches of investors worldwide.

No longer will we be so mesmerized by investor hype that we will forget the fundamentals that govern a sector's ascent to grace on Nasdaq, even if the peddlers of the hype are such Wall Street luminaries as Morgan's Mary Meeber or Merrill's retailing is an awful business, online or offline, with razor thin margins, cutthroat competition, fluid entry barriers and huge upfront marketing expenses. Yet how may of us were awed when Amazon's IPO began to shoot for the stratosphere in 1997? Who cared about their margins or profitability then as we all bought into the vision of Jeff Bezos as a virtual Wal-mart on a global scale? Yet it times changes, so does conventional wisdom in the financial markets.

Internet bookstores are just not cool on Wall Street. Th3e Internet retailing party is over and the terrified guests are never coming back. This begs the obvious question. Is the hyped, overvalued hot sectors of today the dotcom bubbles of tomorrow? No sector is "hotter" on Wall Street now than optical networking. But is this another mass global financial mania designed to end in tears? History never repeats itself, though historians of ten do. Yet there are enough eerie parallels between the dotcom bubble of '98-99 and the hyper-momentum interest in optical networking stocks to at least speculate on the probability that their denouements could be somewhat similar.

I do not believe that optics will end up as Dotcom Bust Part Two. Optics is not a dream for the future but an interlocking set of disruptive, revolutionary technologies that are crucial to the future of the world's telecom architecture. Quite simply, telecom carriers cannot cope with the exponential rise in global data traffic and consequently bandwidth without colossal increases in network capacity, decreases in operating costs and elimination of prevision bottlenecks in their routing / switching architecture. The only technology platform that can meet these strategic imperatives is optical networking. This is totally different form the dotcom bubble, where the entire value proposition was based on a possibly flawed assumption that eyeballs could be monetised by online media and e-commerce revenues alone without spending a fortune on building an offline brand.

Moreover, barriers to entry into the dotcom universe proved illusory. After all, the world really does not need a dozen online retailers of pet foods, does it? Yet can another twelve JDS Uniphases be created out of thin air? Not at all. The proprietary intellectual property assets of the leading optical networking, components and systems companies not only are worth billions of billions of dollars but potentially non-replicable, at least in the short term.

This industry is also in its early stage. If "light speed" is the right speed" for the world's telecom carriers, 50-60 per cent annual growth rates for the leading vendors are not conservative for the next three years. Dotcom mania was also fouled by visions of super-growth but there was a cyclical component to this growth that was left undressed. When the economy tanked, for instance, so did Yahoo's Optics is a hotbed of M&A activity, generally smart money buying technology rich assets to build product portfolios. This, by itself, does not mean the sector is going to be the fairyland of high tech forever. But if the CEO of Cisco is willing to shell out $4 billion in cold cash, the odds are these people know something the rest of us mortals do not. Smart money is not infallible yet there is a definitive scramble in the networking world to buy optics assets. Unlike dotcoms, the path to profitability and margins in the optics world are fabulous. No less than two thirds of a typical telecom carriers costs are labour intensive backbone services and operations costs. This means untold billions in capex dollars that must by spent by a handful of giant Telcos, not the near impossible task of building up one too Net retailing businesses. Optical technologies and protocols are evolving, thus increasing the end demand for products that promise next generation performance metrics. Moreover, venture capitalists have financed optical startups but have closed their money spigot for Internet retailers. This is not to mean that VC financed business models are also, ipsofacto infallible. On the contrary, excess VC funding is an advance indicator that valuation risk rises, not falls in a given sector. Valuations are sky hgh in the optics are JDSU, for instance, is still worth $60 billion even though it has fallen significantly from their highs. Moreover, "leapfrogging" technologies introduce systemic risk to the narrow product, emerging vendors. Sure, this sector will have its valuations in the public markets rise and fall. But will this be another terminal dotcom blowout on Nasdaq?

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

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