JDS Uniphase Rides Fiber-Optic Networks to Investment Wave
Friday was just an average day for JDS Uniphase Corp. While the Nasdaq composite index rose a hair, the company’s stock jumped $3.50 to close at $276, boosting its market value to a stunning $98 billion.
In the last year, JDS Uniphase’s stock has soared by more than 1,100%--a faster climb than even Irvine communications chip maker Broadcom Corp., the better-known gazelle that is among high tech’s superstars.
JDS Uniphase, based in San Jose, makes equipment that operates fiber-optical networks--cables composed of hair-thin glass fibers that carry data on light beams. And JDS Uniphase shows signs of becoming Silicon Valley’s next titan on the strength of demand for fiber optics.
Fiber-optic systems can handle far more traffic than copper wires, making it more practical for managing the billions of data streams that shuttle phone calls, Internet traffic, and cable TV programming.
This is part of the investor stampede to businesses involved in higher bandwidth--supplying the bigger pipes used to pump ever more data between PCs, Web sites, phones and TVs. The greater the bandwidth, the faster the connection speed. Increasingly, businesses and consumers are demanding enough bandwidth to quickly view or download movies and complex graphics--well beyond the abilities of a standard modem.
And the wires that deliver cable TV and voice and data communications to those homes and businesses are fed, increasingly, by fiber-optic cables.
“JDS Uniphase has the wind behind its back twice over,” said Arun Veerappan, analyst with San Francisco investment bank Robertson Stephens. As the cable and telecom giants struggle to upgrade their networks, the optical market is booming. Meanwhile, competitors such as Nortel Networks and Lucent Technologies have ended up outsourcing much of their production to JDS Uniphase, he said.
Such trends mean that JDS Uniphase’s revenue could grow 70% a year for the next several years at least, said David Wong, analyst with PaineWebber in New York. In the latest quarter, JDS’ net earnings (excluding acquisition-related expenses) jumped to $65.7 million, from $26.8 million a year earlier, while revenue jumped to $281.7 million from $128.7 million the previous year.
Fewer than 2% of homes now enjoy high-speed connections such as cable modems or DSL (a similar technology run over phone lines), said James Parmelee, analyst with CS First Boston in New York. But this is changing rapidly and telecom and cable providers must upgrade their capacity, which suggests that optical network businesses are at the beginning of a steep, multiyear growth curve.
Meanwhile, Parmelee said, the price performance of optical components is doubling every nine months--an even faster pace than microprocessors, which have historically doubled their price performance every 18 to 24 months.
JDS Uniphase already is far larger in optical component sales than its primary competitors--Corning and SDL in San Jose, in addition to Lucent and Nortel’s optical divisions. And it’s the only company that has a strong presence in both “active” optical components that generate light signals, and “passive” devices that sit on the fiber-optic lines and guide the light-beam data streams.
Analysts have also compared JDS Uniphase to two Silicon Valley giants--microprocessor leader Intel, and Cisco, the top networking-equipment-maker. They say the company has a shot at mimicking Intel’s manufacturing mastery to dominate its own niche, while showing a Cisco-like flair for acquiring companies rapidly, yet integrating them smoothly.
Indeed, the company is the result of a merger consummated in July between JDS Fitel (the biggest producer of passive-optical components) and Uniphase (the biggest active-component supplier). Since then, it has been rapidly acquiring other optical suppliers. Most notably, in January it agreed to acquire E-Tek Dynamics, a major passive-component rival, for $15 billion in stock.
The acquisition spree has given JDS Uniphase a large manufacturing base and some of the industry’s top optical talent, and considering its stratospheric stock valuation, the buying spree should continue this year, according to analysts. It also helps that JDS’ customers include the major telecom companies, who are reluctant to change suppliers once a relationship has been established.
JDS Uniphase shares are now trading at 283 times estimated 2000 earnings, said PaineWebber’s Wong. But that seemingly inflated figure is below Broadcom’s factor of 313, not to mention the even higher price-to-earnings multiples that characterize many “dot-coms.”
Still, such a high stock price may give investors pause in today’s volatile high-tech sector.
“But the risks are very low for JDS Uniphase,” Wong said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
A Hot Phase
JDS Uniphase, based in San Jose, has seen its stock explode--rising more than 1,100% since early 1999 on the strength of its growing dominance in equipment that operates fiber-optic networks, the backbone of voice and cable TV systems and the Internet.
*
Friday: $276.00, up $3.50
*
Source: Bloomberg News
