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Why I Don’t Own Optical Component Stocks (yet)
A common question I receive is “What optical component equities do you like”.
My answer is pretty simple.
We currently own no optical component equities whatsoever. I believe the industry environment is a hypercompetitive, oversupplied, commodity business. Until consolidation takes place a company could be run by the Steve Jobs of Optical and still not make money. Financal and technical acumen are meaningless if the company is trying to live in a moonscape. In short, some extreme terraforming of the optical component environment needs to happen before I consider living there.
When I was at the Lightreading Conference last month Scott Clavenna asked me if I thought the dark times were over for Telecom. My response was:
I think the recovery everyone is talking about is a reflection of their hopes and desires rather than reality.
Truth be told, I think the soft environment of the last few years is the new reality, and the last six months are not a trend you can lay a ruler down on and extrapolate to 2010. There will be sector exceptions (like GE-PON FTTH) but my perception is people are taking the good news in a few isolated sectors and applying it across the board.
Bookham Inc (BKHM) is a good example of such sentiment. Investors enraged at Bookham’s recent performance should ask themselves some hard questions about why they bought the stock in the first place. If they bought the stock at 7, why don’t they think it’s a screaming buy at 4?
The facts of the optical component industry haven’t changed and investor behavior is still irrational. This sheds some light on the speculative nature of investing that still pervades the Telecom components sector- these investors will need to be burned at the stake by Mr. Market before they get sensible.
I haven’t done any financial, technical, or strategic work on Finisar Corp. (FNSR) but the emotions surrounding this stock reminds me of BKHM. This is the current favorite stock of the few remaining optical zealots who have yet to be beheaded.
The recent capitulation of Bookham, JDS Uniphase (JDSU), and Avanex Corp (AVNX) and the bloody climax of an Optical Reign of Terror worth of Robespierre himself finally has me convinced that it’s time to start researching these equities. Eventually, someone, somewhere is going to make money selling optical modules. It’s time to figure who it will be, and what consolidation process will take place to allow this to happen.
EXCELLENT
I have been buying into the fiber optic space for about two years now. Specifically Bookham. In that time the revenue has consistently grown while costs have been reduced. Long term debt was eliminated and new product lines were introduced. Until the last quarter, margins had improved sequentially for the 8 quarters I followed the stock. Even last quarters margins weren’t bad compared to what they have been in the past.
It comes down to greed for bandwidth. The internet is going to become a video medium, and as it does bandwidth requirements are going to be very large. There is only one technology that can provide this bandwidth and that’s fiber optics. Bookham is the second largest fiber optic component supplier behind JDS Uniphase and can’t keep up with demand now, in the earliest stages of the bandwidth runup.
After September 11 I told anyone who would listen to buy TIE but had to sell my position for the smallest of profits because I needed the money. I learned a powerful lesson I won’t repeat. When I see a resource that is being consumed at an exponential rate, with no alternative technology to steal from its growth, I know its just a matter of time before the companies associated with the material start to make money hand over fist. Fiber optic cables and components are just such a material. I will buy every two weeks for as long as it’s under $5 and thank God people are giving me the opportunity.
Quite simply, you have no idea what your talking about, thanks for the cheap stock.
My average cost on BKHM is about $6.75. I own a lot of it. The Easter earnings warning put me underwater, and it’s been down ever since. Hold from here? Buy more? I’m tempted. This company has lost 80% of its value since its IPO seven years ago. It’s true that optics suppliers have been in a commodity pricing environment for years. Management has added very little value. But major telecoms will need BKHM’s new products, and the cost-cutting is encouraging. Any surprise on either line — top or bottom — drives this stock up sharply. You have to own it.
Bookham is a disaster. Their deal with Nortel is coming to an end, and they have never, ever made money. The only way they have stayed afloat is by bilking investors out of their money. Stock goes to $2 before being delisted. Run away, run away.
They just renewed there deal with Nortel the begining of this year. I think you are referring to the last time buys from there old product line which doesn’t amount to much anymore. As for bilking investors out of their money, give me a break. Very few saw that downturn coming in 2001, they did what they had to do to survive. Now they’ve set up a manufacturing facility in China with lots of extra space to grow to meet demand. They’ve eliminated 60 million in debt and have 60 million in cash. The have 220 million in sales per year with revenue growth of 10% SEQUENTIALLY. They are currently valued at 243 million. This company is a steal at this price.
Bookham reminds me of a drug addict, always looking for that next fix. The fundamental problem (my view) is that they are always late. In a vertically integrated technology based business this is dangerous (at best). They were late getting into low cost manufacturing (well after everyone else). They talk about new products, but their revenue is still way too stuck on legacy products. Their new products are not producing profit like their old products.
The NT deal referred to above was negotiated with a 30% price increase for the last time buy products. An end to that is not a good thing as anything new they are able to sell with be at a much lower margin. In addition, NT is actively working to at least alternate source them to mitigate their dependence on Bookham product. I can only guess how much it upsets NT and CIsco management to hear Giorigo continually refer to them in his quarterly earnings reports.
Anyone considering BKHM which is now in the 2.50′s
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