Forum Archive Index - December 2000

["Ben Dutton" <bendutton@sharechat.co.nz>]

As I write the Nasdaq is down 6% and the Dow is down 2% - it's definitly not
a good day on the US markets - lets hope that the NZSE can continue to
resist (on the whole) following Wall Street's drops...

This article showed up in my inbox this morning from the ever reliable Red
Herring magazine - check it out - it certainly makes for an interesting
read.

Best Regards

Benjamin Dutton


PERSONAL CAPITAL: PERSONAL CAPITAL: Capital at risk

It's not a pleasant time in the market... or is it?

If you're looking to turn a quick buck as a day-trader, it's
a terrible time in the market (unless you're adept at
selling stocks short). But for a real, long-term technology
investor, things are getting interesting.

Remember back in the early 1990s, when not every investor
was a technology investor? Back then you could pick up Cisco
Systems (Nasdaq: CSCO) with a price-to-earnings ratio of 30.
Well, it would be nice to see such values again -- and the
more the bubble deflates, the closer we get.

This year's massive, painful, and volatile correction in
many young technology companies is a by-product of Wall
Street's rush to take companies public. The massive assembly
line of IPOs churned out over the last two years flooded the
market with young, inexperienced, and unprofitable
companies, and a lot of inexperienced investors gobbled them
up. Many of these companies were completely incompetent or
had terrible business models. Others were simply not ready
for the public markets.

This column was started on the premise that the market was
turning into a risky public venture market. That type of
environment demands a closer, more analytical look at
specific vertical technology fields. As clumps of technology
companies in specific markets go public earlier in their
life cycle, investing gets more risky, but the potential for
huge returns is also still there.

THE PUBLIC VC MARKET
Years ago, an emerging market would have dozens of players
funded by the venture community. These companies would fight
tooth and nail for market share and profitability -- in the
private market. Then, after several years of creative
destruction in the market, Wall Street would consider taking
them public.

In the last two years, we saw an elimination of the later
stages of the IPO process. Wall Street stripped out the
requirement for profitability -- or in many cases, even the
requirement for revenue -- and took the companies straight
to the market. You had dozens of companies going public in
the same market, with no prior weeding out in the private
market.

In my mind, this all culminated in July of this year, when
Corvis (Nasdaq: CORV), a promising optical networking
technology company founded by former Ciena (Nasdaq: CIEN)
founder David Huber, went public without any revenues and
certainly no promises of profit on the near horizon. The IPO
was really a $1 billion venture capital round, funded out of
the wallets of public investors, at a valuation that would
make any real venture capitalist cringe. Wall Street quickly
bid Corvis up to a $37 billion market cap within a week.

Corvis's market cap is now $9 billion, as the stock has
fallen more than 75 percent in just four months. This IPO,
more than any others, is a symbol of the extremes tested by
Wall Street. After the recent correction, the market has
become more selective. Will we return to only taking
profitable companies public? Probably not. But reckless and
greedy IPOs with irrational valuations have been put on
hold.

In the venture market, risky and turbulent company life
cycles are the norm -- a company, as it evolves, goes
through fits and starts, customer wins and losses, and an
evolution in management and culture. If the companies blow
up, or need help, the VCs and other investors become
involved. But such investors are accustomed to large amounts
of risk, and they build portfolios that are hedged against
such risk with a "one in ten" philosophy of funding enough
companies to hit at least one grand slam out of every ten
investments. The average investor cannot afford to assume
that much risk.

------------------------------------------------------------
               A D V E R T I S E M E N T

>From the hottest IPO to the latest market trends, you won't
find more extensive business and financial news on the web
than by signing up for Individual.com, the personalized FREE
service that lets YOU choose what's news.
Register at Individual.com now!

http://ad.doubleclick.net/clk;2005797;4971958;y?http://www.individual.com/re
gistration?mc=%m&plcmt=DC-%esid!-%epid!&adcode=%eaid!

              A D V E R T I S E M E N T
------------------------------------------------------------

WHAT NOW?
In the first leg of the correction in April, we adjusted our
attitude toward this new wild-west public market with the
new new rules. One of the rules was that an unprofitable
company (and certainly one without revenues) should never be
valued over $10 billion. Another was that if an investor is
not able to diversify the portfolio and play several
companies in the same technology spaces, you're better off
sticking with bonds or mutual funds.

What you have seen in the market this year is the negative
aspect of that risk -- young, fast-growing but inexperienced
companies can collapse back to earth just as fast as they
sailed into orbit -- all it takes is one sticky quarter.
Take Cacheflow (Nasdaq: CFLO), one of the companies I've
written about, as a recent example. Its quarter was deemed a
disappointment. A rocket ship up, and a lead balloon down.
Surprising? Not really. Painful? Sometimes. But necessary
for the evolution of emerging markets. The company still has
the same potential, but Wall Street's hacked it down for its
short-term bobble.

So, what now? Largely, what we are seeing now is an across-
the-board valuation reality check. When Wall Street gets
gloomy, it dwells on risk and becomes increasingly
pessimistic. Remember that the market is very shortsighted.
You should keep your eye on a two- to three-year time frame.

Can the Nasdaq go to 2000? Possibly. Will it go to zero?
Definitely not. The market should begin the healing process
by the first quarter of next year. Of course, it would help
the process along if the country avoided a civil war and
picked a new president. And history says that the
probability of the Nasdaq rising to new highs within the
next five years is extremely high, barring a complete
collapse of the U.S. economy.

FOLLOW THE LEADER
Many of the companies closely followed by Personal Capital
were picked because they were emerging as leaders in
developing technology markets, and they were also leading
hot trends. For example, BEA Systems (Nasdaq: BEAS) was
gaining momentum in the componentized Web application space.
Companies such as Extreme Networks (Nasdaq: EXTR), Sycamore
Networks (Nasdaq: SCMR), Ciena, Juniper Networks (Nasdaq:
JNPR), and Redback Networks (Nasdaq: RBAK) are leading the
charge in next-generation networking gear.

JDS Uniphase (Nasdaq: JDSU) and SDL (Nasdaq: SDLI) are
gorillas in the optic components space, and their valuations
are finally reaching attractive proportions. Micromuse
(Nasdaq: MUSE) maintains its lead in the field of
telecommunications network management.

Another sector to watch is communications chip makers. Many
of these companies, such as Xilinx (Nasdaq: XLNX) and
Broadcom (Nasdaq: BRCM), were the first to get slaughtered
in the correction, and they are thus likely to be the first
to recover. Xilinx, which has seen its profits grow at a
rate in excess of 80 percent and is now trading at a P/E
ratio of 21, looks downright cheap.

With the IPO pipeline shutting down, these companies I
mentioned, most of which are already profitable, will get
stronger as the upstarts will need more time to raise
capital and catch up. That's why we should now get back to
the basics of technology investing, and look for the
profitable leaders in the public space to extend their
leads.

RECENT LIGHT READING NEWS STORIES

* Patent points to Corvis secrets
  http://www.lightreading.com/document.asp?doc_id=1586

* Cyras: what, us worry?
  http://www.lightreading.com/document.asp?doc_id=1616

* Ciena spooks the market
  http://www.lightreading.com/document.asp?doc_id=1603


- R. Scott Raynovich
  rayno@lightreading.com

* R. Scott Raynovich, former investment editor of
Redherring.com, is executive editor of Light Reading
(http://www.lightreading.com), a global site for optical
networking. He has covered technology markets for more than
seven years. *

------------------------------------------------------------

RELATED LINKS
* Personal Capital: The new new rules.
  http://www.redherring.com/investor/2000/0406/inv-pc040600.html

* What's Corvis's secret?
http://www.redherring.com/investor/2000/0810/inv-pc081000.html

* Fish or Cut Bait: Fiber-optic frenzy.
  http://www.redherring.com/investor/2000/0731/inv-focb073100.html

* Previous Personal Capital: Get ready for broadband.
  http://www.redherring.com/investor/2000/1116/inv-pc111600.html

------------------------------------------------------------

Discuss today's column in the Personal Capital column discussion:
http://boards.redherring.com/WebX?13@^2342@.ee6c58e

or check out forums, video, and events at the Discussions
home page:
http://www.redherring.com/discussions/

------------------------------------------------------------

FREE email newsletters from Redherring.com!

Want insight into the hot IPO market, long-term investing
strategies, future technologies, stocks to watch, venture
capital funding, and more? Get FREE email newsletters in
your inbox from Redherring.com, with the insight, analysis,
and opinion to help you make more strategic business and
personal investing decisions. Subscribe today.

http://www.redherring.com/jump/om/i/business/rhcom/global/subscribe/47.html

------------------------------------------------------------

SPECIAL OFFER on RED HERRING magazine!

Stay on the cutting edge of technology -- subscribe to Red
Herring. By taking advantage of this special offer, you'll
pay only $39 for a total of 24 issues and SAVE 67 percent
off the cover price! New subscribers only, please.

https://www.redherring.com/service/circ/subs_WT.html

------------------------------------------------------------



----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
http://www.netbroker.co.nz/        Trade on Credit, Low Brokerage. Join now.
----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.