Yesterday saw the launch in Chicago of the GlobalComm 2006 event, and we can therefore expect to be deluged with company announcements, with every second company using the magic words such as WiFi, WLAN, WIMAX, FTTH, IPTV, Triple Play, and others. These so called ‘sexy’ acronyms aim to convey to us the message that in the coming years, our homes, our neighborhoods, and our entire cities, will become digital and wireless, with extensive opportunities for high speed surfing from every location, and from any mobile handset.
While there can be no doubting that the massive investment in the roll out of such services is already underway, the main developments have yet to come. Investors don’t have an easy job when it comes to finding the best stocks, the ones that will benefit the most from the expected wave. One can, for example, easily recommend telecommunications equipment giant Cisco Systems (Nasdaq: CSCO), as the company behind the broadband infrastructure of telephony and cable companies as well as the digital home, and therefore, the company best placed to rake in the massive profits that this wave will deliver.
The more speculative investors in the telecommunications sector, myself included, always look for small companies such as Orckit Communications (Nasdaq: ORCT; TASE: ORCT), which, provided the timing of the entry is right, will produce massive returns, in the full knowledge that such an entry can also cause heavy losses if it is made too soon. Orckit’s Corrigent Systems will also be at the Chicago conference and will be exhibiting its capabilities later in the week, although I do not expect the stock to soar, nor the hemorrhaging of recent weeks to abate.
There are some analysts who are continuing to hammer Orckit with downgrades in forecasts and ratings, despite the fact that its market cap has sunk below the $100 million level (excluding cash), the value of a start-up. “The value of a bad start-up,” joked Orckit CFO Aviv Boim at the CIBC conference two weeks ago.
As an investor, at a market cap like this, I have completely written off the potential for further orders from Japanese company KDDI, the customer who lifted us to $31, only to drag us down to Friday’s low of $11.60. Any further business from KDDI will be welcomed, but I now look on Orckit in a different light.
Corrigent is currently working on changes to the support capacity of its equipment, under an assumption that potential big customers will require one single system that can support thousands of subscribers, instead of hundreds as is the case with KDDI. Major tenders in this area are expected to be issued by the end of the year, ahead of the big Triple Play service roll-out (from 2007 onwards) by the big telephony companies in Japan, Korea, France, followed by the US.
The most logical scenario for Orckit would be to team up with one of the big equipment suppliers that does not have any solutions of its own, and make a joint bid for major tenders. I understood from the CIBC conference that France’s Alcatel (NYSE: ALA; Paris: CGEN) is the only company with a rival solution to that of Corrigent, although it does not have the technological advantages that the Corrigent solution has. Cisco, Juniper Networks Inc. (Nasdaq: JNPR), and Foundry Networks Inc. (Nasdaq: FDRY) will all begin taking an interest in Orckit, once the tenders are published.
As far as stock price is concerned, I cannot predict what the rock bottom price will be, since every stock sometimes experiences irrational hyperactivity in both directions. I am convinced, however, that the moment the big tenders go out at the end of the year, the speculation alone will send the stock soaring, even before Orckit wins any contracts.
For those who don’t remember, Orckit soared by hundreds of percentage points, one year before it officially announced the winning of the KDDI contract. A market veteran had this to say to me about Orckit, “You should have sold the stock as soon as all the analysts discovered it and start raving about it. Buy it again once they’ve finished downgrading their ratings.” It looks to me like this will happen soon.
Metalink (Nasdaq: MTLK;TASE: MTLK) is another broadband and digital home stock that I hold in my portfolio. Like Orckit, it too has a good chance of making a breakthrough by next year, despite that it also carries a substantial risk. The stock has risen 50% since November 2005, despite its heavy current losses and the fact that it has not made a single dollar in sales in its own cutting edge field - the WLAN chip market. As in the case of Orckit and its KDDI contract, investors are quietly picking up Metalink shares without any fanfare, and the first analysts are beginning to discover it.
Last Friday, a small but well known technology investment house by the name of Think Equity Partners LLC, published a ‘Buy’ rating for Metalink and set a target price of $9 a share. It said that Metalink had already won contracts to supply wireless chips to the HDTV home market, with commercial shipments to begin in mid-2007.
The chip in question complies with the new 802.11n standard that has not yet received final approval. When I talked to him several months back, Metalink CEO Tzvika Shukhman said of the new chip, “I launched an intercontinental missile four years ago and I hit the target.” Think Equity analyst Anton Wahlman agrees with Shukhman and believes that, despite the tough competition that Metalink will face from giants such as Broadcom (Nasdaq; BRCM), Marvell Technology Group (Nasdaq: MRVL) and the aggressive Atheros Communications (Nasdaq: ATHR), there will be enough room in the market for everyone. Wahlman predicts that Metalink will supply 4.8 million, wireless at $8 per unit in 2007, and that this will rise to 13 million chips in 2008.
Published by Globes [online], Israel business news - www.globes.co.il - on June 6, 2006
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